The impact of income taxation on economic growth in Zambia (1995-2015)

Abstract

This study examines the impact of income taxation (corporate income tax, extractive royalty tax, and pay-as-you-earn) on economic growth in Zambia over the period 1995 to 2015. The study applied a vector error correction model (VECM). The study found that corporate income and pay-as-you earn taxation had no significant impact on economic growth in the short-run. However, extractive royalty taxation was retrogressive to economic growth in the short-run. The study also found that pay-as-you earn and extractive royalty taxation had a significant negative impact on economic growth in the long run. Furthermore, economic growth was found to respond to changes pay-as-you-earn and extractive royalty taxation with a lag, over a number of years. The findings of this study suggest that policymakers should come up with an optimal taxation structure in which taxation of income is not excessive. This is because excessive taxation of income can reduce economic agents’ incentives to save, invest, and work. Key words: Income taxation, economic growth, VECM, Zambia.