Innovation Accounting of Tax-Revenue Drivers : Cointegration Evidence from Ghana

This study uses cointegration, and innovation accounting analysis to examine the volatility and extent of the short-term and long-term relationships between the drivers of tax revenues and tax revenues in Ghana from 1980 to 2011. The principal and consistent discovery from this study is that cocoa farmers' tax (CFTAX) is the least volatile and import taxes (IMPTAX), is the most volatile in the observed period. The estimated cointegrating relationships identify at least two long-run vectors for the drivers of tax revenues. We also find that among the drivers of tax revenues, the cocoa farmers' income taxes are the quickest to adjust to long-run equilibrium in the current year. The forecast error variance decompositions reveal that the cocoa farmers' income taxes are the strongest endogenous of the VAR system driver of tax revenues, and that they play a dominant role in Ghanaian tax revenues in the observed period. The empirical evidence supports the descriptive statistics that cocoa farmers' income tax revenues remain the largest and most reliable source of income for the Ghanaian economy. Since tax revenues from cocoa farmers continue to drop because of falling cocoa futures and low production, Ghanaian policymakers must diversify their taxrevenue drivers to include a sales tax on discretionary goods and services such as imported tobacco and imported alcohol. As tax revenue increase option has become elusive, the hardline option is to gradually eliminate government expenditures in the areas of colonial delicacies such as free fuel, chauffeurs for government officials (ministers and members of parliament etc), excessive per diems from the president to other government officials and many more, just to mention but few