Research On The Relationship Among Taxation, Public Expenditure And Economic Growth

Since1994, China has experienced a large scale Tax Reform in1994and thereform to build the framework of public finance during the National Conference in1998. Through these reform, both tax revenue and the public spending haveexperienced a continued increase. And their percentages of GDP, respectively, havegradually improved. For developed countries, however, this ratio is still low. China, asa developing country, the basic objective of macroeconomic policy is to keep a soundand rapid economic development. Taxation and public spending are the primarymeans of macro-control. To explore the relationship between these two factors andeconomic growth will be a great guidance for government to use economic theory toregulate tax scale and public spending scale. And it can provide a reference about howefficiently utilize financial leverage to promote economic growth.This paper mainly explores the relationship among taxation, public expenditureand economic growth.It selects the quarterly GDP data、 monthly taxation and publicspending data as a variable index. When previous studies faced such problems, theyusually discarded some high-frequency information、constructed the same frequencyform and studied the relationship among these three factors with the help oftraditional vector autoregression model (VAR). However this method lost someinformation, resulting in biased results. In this paper, in order to make full use ofobservable data and avoid loss of informations, this paper builded a mixing frequencyvector autoregression model (MF-VAR), so it can take full advantage of all theinformations on taxes, public spending and economic growth which have been studied.To verify that the MF-VAR model is superior to the traditional VAR, this paper alsotook a comparative analysis of parameters between these two models. The resultverified that the estimated results from the MF-VAR model was more effective thanthis from the traditional model. Impulse response function diagram of the two models are more intuitive proof of this conclusion. Empirical results about the relationshipamong the three factors showed that: Tax and public spending can promote each other、effect each other and reflect a synchronization;In addition,Wagner rule was presentin China,in a short term, economic growth would play a positive role in increase ofpublic spending, which meaned that the higher of economic growth,the more publicspending; Impulse response also found that economic growth had a role in promotingthe growth of tax revenue, but this effect was transient while the tax effect oneconomic growth was not obvious even little.Thus, The taxation and public spendingas the fundamental methods for implementing government functions needed tocoordinate the development and mutually reinforce.since1994Wagner law has beenestablished in our country, but for our country ’s growing economy, public spendingcan reach a stable level in future. Among the macro tax burden、tax revenue andeconomic growth, Laffer curve showed a interdependence and a mutual restraintassociation. Theory indicated that there was an optimal level of macro tax burdenbetween taxes and economic growth.