Causality between Tax Revenue and Government Spending in Malaysia

Abstract

The trend of tax collection in Malaysia is inconsistent, changing upward and downward depending upon economic conditions. However, over a 30 year period, most years show an increasing increment in total collection. The exceptions are when there is an abnormal economic condition such as financial crisis, war or increase in world oil prices. Total tax revenue has always been a major contribution to Malaysia’s federal government revenue. Income tax is one of the surest ways to fund the government. The main objective of this study is empirically tests the causality between tax revenues and government spending in Malaysia for the past 36 years by applying an econometrics model. The results provide evidence for the existence of a long-run relationship between tax revenues and government spending with unidirectional and bidirectional causality in VAR models for the sample period 1970-2006.

JEL Classification: C01, H20, H59