The Short and Long Run Effects of Selected Variables on Tax Revenue - A Case Study

Abstract

The main objective of this article is to empirically examine the short and long-run relationship between real tax revenue and real local government expenditure as well as investigate the relationship between real sales tax revenue and real individual tax revenue and selective variables in Washington, D.C. for the period ranging from 1984-2015. The study uses the Johansen co-integration techniques as well as the bivariate and multivariate vector error correction model (VECM). The results indicate that there is a unidirectional and one-way causality running from real local government expenditure to the real DC’s tax revenue in the short and long-run, but not vice versa. The finding indicates that DC’s tax revenue changes local government expenditure. As a result, budget deficits can be avoided by implementing policies that stimulate DC’s tax revenue. The Granger-causality test shows that DC resident employment does affect real individual tax in the short and long-run, simultaneously. The Granger-causality test shows that DC resident employment, household’s population and stock of housing does affect real sales tax revenue in the short and long-run simultaneously. Furthermore, the results of the impulse response function (IRF) indicate that household’s population and stock of housing are the major short-run effect on the real individual income tax and real sales tax revenue.