Non-tax Revenue and Local Economic Growth ——The Case of Taiwan

Economic Management Journal February 2015, Volume 4, Issue 1, PP.8-14

Non-tax Revenue and Local Economic Growth ——The Case of Taiwan Hsiu-Wei Chang, Yi-Chung Hsu # Department of Public Finance and Taxation, National Taichung University of Science and Technology, Taichung, Taiwan #Email: hsuyichung@yahoo.com.tw

Abstract The aim of this paper mainly focused on the relationship between non-tax revenue and local economic growth by using 20 counties and cities in Taiwan. Time series data for non-tax revenue and local economic growth has been taken for the period 1998 to 2012. It is important to note that this is in the study of local finances, research into non-tax revenue and local economic growth has so far been the neglected area. We use three different proxies variables (non-tax revenue to tax revenue, non-tax revenue to year revenue and non-tax revenue per capita) to create our query, our conditional variables consist of (a) tax revenue per capita (b) self-finance resources ratio (c) government size (d) fiscal autonomy (e) urbanization index (f) population density (g) road destiny (h) unemployment rate and (i) education human capital. Our results find that the raising non-tax revenue can significantly be improved local economic growth by effective and efficient policy decisions. This main finding confirms not only the non-tax revenue may help the local government to improve the fiscal imbalance in resource mobilization but also the engine of local economic growth.

Keywords: Non-Tax Revenue; Panel Data; Economic Growth

1 INTRODUCTION Over the last few decades, there has an enormous amount of works which study into relationship between tax revenue and economic growth in public finance. (Adkisson and Mohammed, 2014; Bae, Moon and Jung, 2012; Alm and Rogers, 2011; Poulson and Kaplan, 2008; Holcombe and Lacombe, 2004 etc.). In comparison, there is much less works, at least in public finance, researching into the effect of the non-tax revenue on economic growth. Recently, the Great Recession of 2008 caused losing revenue in the each local area, government revenue is a major concern in a wide variety of application such as state (or local) tax rate, tax structure, marginal tax, tax burden, and non-tax revenue. The majority of government revenue in public finance has focused on the state (or local) tax rate and tax structure. In this paper, we explore the effect of non-tax revenue on local per capita income growth to determine whether there are public policies that foster higher or lower local economic growth rates. The purpose of this paper is to quantity the effect of non-tax revenue on local per capita income growth to determine whether there is a way to policy maker to foster higher or lower growth rates.

There are numerous empirical studies which research into the effect between local taxation and economic growth.

(Adkisson and Mohammed, 2014; Bae, Moon and Jung, 2012; Alm and Rogers, 2011; Poulson and Kaplan, 2008; Holcombe and Lacombe, 2004 etc.). Follow by Adkisson and Mohammed (2014), it indicate that both neoclassical and endogenous growth models provide the theoretical foundations for these studies. Barro (1990, 1991), King and Rebelo (1990), Mendoza, Milesi-Ferretti, and Asea (1997), and Lucas (1990) use endogenous growth models to examine both the positive and normative taxation effects. Most, but not all, if these studies support evidence of a negative effect of taxation on various measures of local economic performance. (Poulson and Kaplan, 2008).

Furthermore, there are few empirical studies directly focused on studying in non-tax revenue and local economic growth. (Baxi, 2009; Alam and Shil, 2009; Pandey and Dixit, 2009). In the study of Alam and Shil (2009) pointed that the performance of non-tax revenue not only can significantly be improved through effective and efficient policy markers, but also may help the country to cope with the fiscal imbalance in each area. That means, the non-tax -8www.emj-journal.org

revenue is a one of the crucial factor to local government. According to National Statistic, (R.O.C.) which shows that tax revenue and non-tax revenue as a percentage of total revenue covering 1998 to 2012. During this period, local area experienced both economic growth boom and recession. In particular, the total tax revenue as the share of almost 70% of the total revenue, the other hand, the non-tax revenue as proportion of almost 30% of the total revenue. Those data showing the non-tax revenue has so far been played a very important role in each area.

Furthermore, it is important for us to examine the impact of this issue in the study of local finances, research into non-tax revenue and local economic growth.

The main objective of this research is examine whether the non-tax revenue impact on local economic growth or not.

We mainly focused on the relationship between non-tax revenue and local economic growth by using 20 counties and cities in Taiwan. Time series data for non-tax revenue and local economic growth has been taken for the period 1998 to 2012. This study will provide empirical evidence that examination of the economic effects of non-tax revenue is important in both practical and theoretical aspects. Practically, our empirical results are timely because the current economic downturn may worsen local area budget deficits or reduce surpluses. We want to observe whether non-tax revenue should be cautions of local policy makers and government to improve the economic growth in each area.

2 LITERATURE REVIEW With a long and rich history, several researches have studied into a wide variety of ways in which the relationship between the fiscal policy and economic performance in each area. Both neoclassical and endogenous growth models provide the theoretical foundations for these studies. Those studies showing both the positive and normative taxation result which used endogenous growth model. (Solow, 1956; Swan, 1956; Romer, 1987, 1990; Barro & Sala-i-Martin, 1992; King & Rebelo, 1990; Mendoza, Milesi-Ferretti, & Asea, 1997; and Lucas, 1990). However, a number of studies have shown differences in economic performance across different situations.

2.1 An Overview of the Revenue Structure in Taiwan The Ministry of Finance (R.O.C.) , as the highest administrative organization of taxation in Taiwan, lays down taxation policies, enacts tax laws and oversees the levy and collection of taxes. According to Act Governing the Allocation of Government Revenues and Expenditures (R.O.C.) , total revenue of Taiwan can be classified into two components —tax revenue and non-tax revenue. Besides, total tax revenue in Taiwan is consisting of two parts, “National Tax” and “Special Municipality and County taxes”. Tax levies are divided into national, special municipality, and county (or county-level city) taxes. The following taxes are national taxes: income tax, estate and gift tax, customs duties, business tax, commodity tax, tobacco and alcohol tax, securities transaction tax, futures transaction tax and mining concession tax. However, all of the tax revenue shall be redistributed in certain percentage from the central government to the special municipalities, counties and county-level cities according Act Governing the Allocation of Government Revenues and Expenditures (R.O.C.), that’s means, a certain percentage of total national taxes will be assigned to the local government in each area.

However, non-tax revenue is not generated from tax, which is also very important revenue resource for each local government, is consists of as following: revenues from monopoly utilities and monopoly sales, revenues from community development fees assessed on construction projects, revenue from fines and compensation, revenues from charges and fees, trust management revenue, property revenue, operating surpluses, donations and contributions, and other revenues and subsidy and assistance revenue. Nevertheless, with restraints on the allocation of national tax revenue resources by The Ministry of Finance (R.O.C.), there may lead to process of increasing in revenue size, the growth of Non-Tax Revenue in each area.

2.2 Items of Non-Tax Revenue in Taiwan Fiscal According to Act Governing the Allocation of Government Revenues and Expenditures (R.O.C.), non-tax revenue in Table 1 is consists of as following: revenues from monopoly utilities and monopoly sales (MONOPOLY), revenues from community development fees assessed on construction projects (PROJECT), revenue from fines and -9www.emj-journal.org

compensation (F&C), revenues from charges and fees (C&F), trust management revenue (TRUST), property revenue (PROPERTY), operating surpluses, donations, contributions and other revenues (OTHER) and subsidy and assistance revenue (S&A).

TABLE 1 THE RESULT OF POOLING OLS MODEL

EXPLANATORY VARIABLES CONSTANT NONTAX/TAX NONTAX/YEAR NONTAX/POP TAX/POP SELF GOVS FISCAL URBAN POPD ROAD UR EDU R2 Obs.

MODEL 1 -0.120 (0.24) 0.061*** (0.00)

MODEL 2 -0.187* (0.09)

MODEL 3 -0.053 (0.55)

0.358*** (0.00) 4.780*** (0.00) 0.001* (0.06) -0.819*** (0.00) -0.002-*** (0.00) 0.054 (0.56) 0.000 (0.36) -0.0005 (0.88) -0.018*** (0.00) -0.061 (0.51) 0.083 300

4.503*** (0.00) 0.001** (0.04) -0.584*** (0.00) -0.001* (0.07) 0.008 (0.93) 0.000 (0.61) -0.002 (0.57) -0.018*** (0.00) -0.020 (0.82) 0.074 300

8.682*** (0.00) 5.143*** (0.00) 0.001*** (0.00) -1.766*** (0.00) -0.002*** (0.00) 0.039 (0.65) 0.000 (0.24) 0.002 (0.55) -0.012*** (0.02) -0.273*** (0.00) 0.193 300

Note: *, ** and *** indicate significance at the 10 per cent, 5 per cent and 1 per cent levels

2.3Fiscal Policies and Local economic growth Non-Tax Revenue and Local economic growth As the review has shown, most public finance research on the extent to which government revenue is beneficial to local economic growth has been undertaken. Followed by Alm and Roger (2011), to test the local fiscal policies affect local economic growth, Alm and Roger (2011) reported the results of an empirical analysis of economic growth in the United States for the years 1947 through 1997. They presented empirical results against which the theoretical models of economic growth can be compared, which building upon the exogenous growth models of Solow (1956) and Swan (1956), and the endogenous growth models of Romer (1987, 1990) and Barro and Sala-iMartin (1992). Among other researches, there are many empirical studies which were attempting to estimate the determinants of economic growth. Many of these studies examine the growth experience at the cross-region approach. See Weil (2005) for recent survey of much of this literature.

2.4 Tax Revenue and Local economic growth A lot of research works have been done in this field to seek for the relationship between tax revenue and economic growth in each locality. Few studies, however, have offered few conclusions as to the effects of taxes on economic growth. Most of researchers have used a wide range of explanatory variables in both “cross-regional” and “crosscountry ” studies. Not surprisingly, a vast literature that explores the effects of taxation on growth has emerged over the ensuing decades, much of it showing a negative correlation.

The related taxes affected growth works reported in the literature can be classified into three major conclusions. A number of studies that have investigated how increasing taxes increase economic growth for productive purpose: Helms (1985), Phillips and Goss (1995), Miller and Russek (1997), and Bania, Gray and Stone (2007). Even so, several studies (Mullen and Williams, 1994; Besci, 1996; and Reed, 2008) have shown a negative effect on economic growth. In other studies, however, have shown a weak effect of taxes on economic growth ( Romans and Subrahmanyan, 1979; Wasylenko and McGuire, 1985; Stokey and Rebelo, 1995; and Tomljanovich, 2004).

For more recently studies, which have shown that even if there is a negative relationship, it may not be possible significant. Holcome and Lacombe (2004) explored this long debate with regard to the potential negative impact of local income taxes in local economic, they pointed out that if local taxes are small relative to federal taxes, and if federal policies in each area, creating uniformity among the locality, tax policy may not significantly impact local economic growth. Marc (2004) examines the effects of changing tax rates on both state per capita output levels and growth rates. Using pooled annual state-level data in U.S. from the period 1972 through 1998, the result indicate that - 10 www.emj-journal.org

higher tax rate negatively impact state economic growth in the short-term, which lowers state output level, but longrun growth is unaffected by changes in state tax rates.

The later robust work of Reed (2008) proposes that dividing the data “five-year” period by examining growth across U.S. states from 1970 to 1999. Under different time period, geographical regions and various estimation techniques, Reed (2008) found a negative effect of tax burden on economic growth in each area. Moreover, Reed pointed out raising total taxes to fund non-welfare expenditure exerts a negative effect on growth both in the long run and short run. Although substantial studies of taxes have been performed on the critical factors that affect local economic growth, those of non-tax study are still critically lacking.

2.5 Non-Tax Revenue and Local economic growth There has been little empirical research on non-tax revenue. Little literatures have been done on the relationship between non-tax revenue and local economic growth. Deciding on causality between non-tax revenue and local economic growth, the existence of nexus between non-tax revenue and local economic growth can be examined in several ways. In the study of Pandy and Dixit (2009), they examine cross-region data for the 20 states in India for the period 1974 through 2007, using Engle Granger Methodology (ECM) to explore the causality between non-tax revenue and Local economic growth. However, Baxi (2009) examines the determinants of non-tax revenue using panel data by using 16 major Indian states over a period of 18 years. It emphasizes the fact which rather than relying only on tax levies from productive activities, the local government should find their own area to manage non-tax government revenue. Similarly, Alam and Shil (2009) conduct the study of non-tax revenue performance in Bangladesh.

In sum, existing researches for the effects of non-tax revenue on local economic growth are very few. It is important for us to examine the impact of this issue in the study of local finances, research into non-tax revenue and local economic growth.

3 EMPIRICAL RESULTS 3.1 Descriptions and Sources of Data Our empirical sample covers 1998-2012 periods, and 20 counties and cities are used. The dependent variable GROWTH is taken from National Statistics (R.O.C.). The explanatory variables NONTAX/TAX, NONTAX/YEAR, NONTAX/POP and the four public and political policy variables (TAX/POP, SELF, GOVS and FISCAL), three geography variable (URBAN, POPD and ROAD) and two level of employment variables (UR and EDU) are also taken from National Statistics (R.O.C.).

Our 20 sample counties and cities comprise four areas, the North area (7 Counties and Cities), the Central area (6 Counties and Cities), the South area (4 Counties and Cities) and the East area (3 Counties and Cities). In geography order, the North area are Keelung City, New Taipei City, Taipei City, Taoyuan County, Hsinchu City, Hsinchu County and Miaoli County; the Central area are Taichung City, Changhua County, Nantou County, Yunlin County, Chiayi County and Chiayi City; the South area are Tainan City, Kaohsiung City, Pingtung County, Penghu Country; the East are Yilan County, Hualien County and Taitung County.

3.2 Benchmark and extended Model Table 1 present the estimated results of Equation (6), (7) and (8) which using the ordinary least square method (OLS).

There are three specifications in this table because three different proxies for non-tax revenue (NONTAX/TAX, NONTAX/YEAR and NONTAX/POP) are attempted, resulting in three specifications.

When the OLS is employed, the results show a striking effect of non-tax revenue on performance in local economic growth rate. The proxy for non-tax revenue, all the coefficient of non-tax variables (NONTAX/TAX, NONTAX/YEAR and NONTAX/POP) are found overwhelmingly significantly positive – that is, increasing the size of non-tax revenue to tax revenue, the size of non-tax revenue to year revenue and non-tax revenue per capita increases economic growth. This phenomenon underscores the potential gains associated NONTAX/TAX, - 11 www.emj-journal.org

NONTAX/YEAR and NONTAX/POP in increasingly local economy in counties and cities. Overall, the results of non-tax revenue on local economic growth have been very positive.

The results revealed that tax revenue per capita appears to be an important variable in local economic growth. The coefficients of TAX/POP, which are the proxy for tax revenue per capita in each area, are found overwhelmingly significantly positive. TAX/POP is found to have a beneficial effect at all on growth rate, implying that the tax revenue per capita has an impact on the growth rate. The coefficient of SELF is used as a proxy for the rate of selffinancing resources by Taiwan local government in each area, significantly positive coefficient suggest that increasing the rate of self-financing resources increases local growth rate. Clearly, the finding indicates that both tax revenue per capita and self-financing resources have positive effect in performance of local economic.

The size of government is found to have a negative effect at all on growth rate, implying that the larger size of government the lower local economic rate. For considering the local government difference in each area, the coefficient of government size (GOVS), which is the proxy for local government difference, are found overwhelmingly significantly negative. The implication here is that the larger size of local government the lower growth in each area. It means the higher government size may lead to lower economic growth rate. The coefficient of fiscal autonomy index (FISCAL) is found significantly negative. That means, the larger fiscal autonomy index local governments have, the lower local economic rate caused.

The coefficients of unemployment rate (UR) are the first proxy for level of employment, which are found overwhelmingly significantly negative on growth. While lower unemployment rate may imply higher growth in each area, it is also suggestive of reducing unemployment rate in the local.

4 CONCLUSIONS The present paper provides the result of the relationship between non-tax revenue and local economic growth. We report the results of an empirical analysis of economic growth in the Taiwan counties and cities for the years 1998 through 2012. We use three different proxy variables (NONTAX/TAX, NONTAX/YEAR and NONTAX/POP) to create our query; we also considered that as the effect of a wide range of other local geography, demography, public and political policy, level of employment and urbanization. Using panel annual Taiwan counties and cities data from 1998 through 2012, a fixed-effect model is employed to estimate the effects of non-tax revenue on local per capita income growth.

However, we do this through the design of an econometric model as a function with other controls appropriate, including (a) tax revenue per capita (b) self-finance resources ratio (c) government size (d) fiscal autonomy index (e) urbanization index (f) population density (g) road destiny (h) unemployment rate and (i) education human capital. Our results find that the raising non-tax revenue can significantly be improved local economic growth by effective and efficient policy decisions.

The most important findings of this study also have implications for local policy maker. Three of these findings are worth summarizing: First of all, our results find that the raising non-tax revenue can significantly be improved local economic growth by effective and efficient policy decision. Next, our main finding confirms not only the non-tax revenue may help the local government to cope with the fiscal imbalance in resource mobilization but also the engine of local economic growth. Next, among the public and political policy factors that affects the relationship between non-tax revenue and growth, the proxy variables (TAX/POP, SELF) showing the results which support the notion that both increasing tax revenue per capita and self-financing resource ratio evidently improve the positive impact on local economic performance. That is, progress in public and political policy of tax revenue and year revenue in each locality facilitates growth. Third, turning to GOVS and FISCAL, the policy implication here is that the larger size of local government and the higher fiscal autonomy index, causing the lower growth in each area. Last, our results do not vary qualitatively when we consider the effect of outliers, endogeneity, and data restriction. However, this study has taken a step in the direction of defining the relationship between non-tax revenue and local economic growth. This main finding confirms not only the non-tax revenue may help the local government to improve the fiscal imbalance in resource mobilization but also the engine of local economic growth.

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AUTHORS 1Hsiu-Wei

Chang (1990- ), Master Program

2Yi-Chung

Hsu (1972- ), Ph.D., Department

of Public Finance & Taxation, National

of Public Finance and Taxation, National

Taichung

Taichung

University

of

Science

and

University

of

Science

Technology, Taichung, Taiwan.

Technology, Taichung, Taiwan.

Email: t3andy1025@gmail.com

Email: hsuyichung@yahoo.com.tw

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and