Tax Revenue, Private Investment and Real Income in Greece : Evidence from Multivariate Cointegration and Causality Analysis

This study examines the relationships between tax revenue, private investment and real income in Greece. Using data from 1980 to 2011, we apply the bounds testing approach to cointegration proposed by Pesaran et al. (2001). We find a long-run relation among the variables with real income having strong adverse effect on tax revenue and private investment having significant positive impact on tax revenue . The results of Granger causality tests show unidirectional causality running from real income and private investment to tax revenue in the long-run. In the short-run causality runs from investment to total tax revenue. On the other hand, results of the Granger-causality tests support the existence of a bidirectional causality between real income and tax revenue. These findings provide evidence that tax policy can affect real economy and tax revenues and, therefore, budget deficits, depend upon investment in the private sector