The relationship between tax revenue, government expenditure, and economic growth in G7 countries: new evidence from time and frequency domain approaches

Abstract

In this study, the relationship between tax revenue, government expenditure, and economic growth has been examined for Canada, France, Germany, Italy, Japan, UK, and the USA-the G7 countries using annual data from 1980 to 2016. The study used two different panel causality approaches in order to make a comparison. According to the time domain panel causality test results, there are a bidirectional causality between economic growth and government expenditure but unidirectional causality between tax revenue and government expenditure. Moreover, there is no causal relationship between economic growth and tax revenue. On the other hand, frequency domain causality results show that there are a bidirectional short- and long-run causality between economic growth and tax revenue, and long-run causality between economic growth and government expenditure. The main finding is that the taxation policies to be implemented on the basis of the economic conjuncture of G7 countries are a powerful financial tool, with the potential to serve the economic objectives to be achieved.