The effects of Taxes on The Economic Growth of a Country: The case of Liberia



This paper attempts to evaluate the impact of individual types of taxes on economic growth by utilizing regression analysis. In general, the regression analysis represents a statistic method examining relations of dependencies among dependent and independent variables with the aim to determine the impact of independent variable changes on dependent variable. The paper is based on entrepreneurs complains on the taxes imposed by the Liberia Revenue Authority (LRA), qualifying some of them as arbitrary. With the advent COVID 19, it is important and imperative to come out with some solutions that may mitigate entrepreneurs fears vis-à-vis the LRA policies on tax collection. The paper is divided in three sections. The first part of the paper lays the foundation of the Liberian entrepreneurs complains. The second part gives some preliminary answers provided by the Liberian government. In the last part of the paper, some economic growth theories with regard taxation will be discussed.

By Dr Samora P.Z. Wolokolie, MBA, CFE, CA, CPA, CFIP, CTP, PhD

Key words: Taxes, Liberia Revenue Authority, Economic Growth.

Bottom of Form


According to the World Bank, Liberia has a challenging fiscal position as it depends to some extent on external grants as a source of revenue. One of recent IMF Article IV mission to Liberia (February 25 – March 8, 2019) concluded that macroeconomic stability has proved elusive and fiscal stance has loosened significantly during the second half of 2018 calendar year despite improved revenue collection. At the same time GDP growth estimate for 2018 has been reduced from 3.2 to 1.2 percent, while the forecast for 2019 has been revised down even more dramatically from 4.7 to 0.4 percent. This will inevitably reduce the projected tax base and put additional pressure on revenue reforms to compensate for slower GDP expansion and sufficiently expand the resource envelope to enable a much-needed increase in social spending. The figure 1 provides an example of percentage of peoples complaining about tax rates.

Figure 1: Percentage of peoples complaining about the tax rates in Liberia and selected countries.

Figure 1: Percentage of peoples complaining about the tax rates in Liberia and selected countries.

It must be noticed that for some time many investors or local entrepreneurs are complaining about the Liberian tax policies with regard their collection. Most Administrative Regulations that are being enforced by the Liberia Revenue Authority (LRA) are arbitrary, meaning that they have not been promulgated and published through the Ministry of Foreign Affairs in keeping with the requirements enshrined in the Revenue Code of Liberia. Additionally, Section 10.5 (1) of the Executive Law requires that the President of the Republic of Liberia is to approve all regulations but this has not been the case.  More besides, some of the aforementioned regulations are excessive in application with specific reference to the Destination Inspection Penalty regulation that has been in use for over ten (10) years, states 10% on CIF value for first & second DI offense, 20% for third & fourth DI offense and 30% for fifth DI offense and above.

Another excessive tax instrument designed by LRA and referred to as “PRACTICE NOTE NO. 1-2016” has also not met presidential approval nor been promulgated and published through the Ministry of Foreign Affairs but is being enforced. The document instructs that the calculation of excise tax for selective products, alcoholic beverages and tobacco products MUST be on “tax-on-tax”, meaning that the ad valorem excise tax rate now 80% must be multiplied by the (CIF plus Import Duty plus ETL plus CUF) to derive total excise tax payable only on these two products which violates the principles of uniform assessment as mentioned supra under Section 1207 of the Revenue Code of Liberia.

The undue delay of refund to tax payers by LRA when an over payment of tax due is established must be addressed, thus disallowing the tax payers to always be at the disadvantage end in the Government-tax payers partnership. Also, the deliberate delay to adjudicate protest cases by LRA to the level of a year or more is unfair and frustrating to the tax payers. Redress must be given by LRA to tax queries in the soonest possible time interval to restore confidence and trust in the Government-Tax payer’s partnership. It is hereby recommended that the Board of Tax appeal be reconstituted to fill the vacuum in dealing with this issue.

That considering the current economic conditions of the country where inflation has seriously undermined the purchasing power of the ordinary consumers who suffer the trickle-down effect of tax increment in any given situation, it is hereby recommended that the Tax Amendment Act which was approved on December 20, 2016 and published on the 22nd December 2017 instant in which taxes were increased but was not accompanied by adequate public tax awareness, be further reviewed and revert to status quo ante pending economic normalcy divorce of inflation, uncertainty and inconvenience in the competitive market environment, the dual currency exchange rate and other economic factors in the country. Being cognizant of the fact that Government needs to collect revenue, it should be paralleled, noted that the certainty and convenience of the tax paying public is paramount in the endeavor as outlined in Adam Smith’s book, “The Wealth of Nations” under the principle of taxation. 


The aim of this paper is to evaluate the impact of individual types of taxes on economic growth by utilizing regression analysis. In general, the regression analysis represents a statistic method examining relations of dependencies among dependent and independent variables with the aim to determine the impact of independent variable changes on dependent variable. In general, it can be in the form of time series, cross-sectional or panel data analysis. In this paper, we are going to show that taxation influences economic growth through its impact on the realization of investment and capital accumulation, on human capital and technology advancement.


In such a tight fiscal situation, the imperative is to secure equal or improved quality of public services by prioritizing and improving the composition of expenditure, enhancing efficiency, and expanding the resource envelope by stepping up the revenue mobilization efforts. Sustaining pro-poor development agenda, will likely require a political resolve to reduce the share of government resources devoted to high paid public servants and discretionary expenditures, as well as improve the efficiency and transparency of government spending. Otherwise, the financing gap created by an announced decline in grants and other forms of external assistance may be difficult to close. (World Bank, 2018)

Liberia’s main domestic taxes include corporate income tax, personal income tax, goods and services tax, and excise tax. The Liberia Revenue Authority (LRA), in charge of administering revenues in Liberia. The LRA was established on July 1, 2013 replacing a revenue department of the MFDP. Recently, LRA implemented a wide range of measures to improve tax compliance and to reduce leakages, such as introducing a desk audit system for large taxpayers and educating taxpayers through workshops with support of development partners. A new compliance management framework was introduced in the first half of 2017 for further improvement of revenue mobilisation.

Referenced resolution of February 1, 2017 under the banner of the Patriotic Entrepreneurs of Liberia (PATEL), in which some burning issues affecting Liberian businesses and the well-being of the Liberian people in general were highlighted and presented to the National legislature and the Executive branch for their intervention to curtail the situation, the following explanations with recommendations that will pacify the situation to wit must be followed.

For example, on Count 1.0 (b) of the Resolution “Halt to multiple assessments on imported goods by LRA” by definition means the Liberia Revenue Authority must secure uniform assessment of customs duties in keeping with Section 1207 of the Revenue Code of Liberia and must be done at one-stop-shop instead of   multiplicity of assessments. In the same vein, BIVAC Clean Report of Findings (CRFs) once obtained by the importers as required under the Pre-shipment Regime should serve as final arbiter for customs duties collection by Government instead of re-assessing CRFs and uplifting duties already calculated by BIVAC to avoid uncertainty.

It should be noted that the issuance of Clean Report of Finding on any imported or exported consignment entails that BIVAC has done the relevant due diligence on price/valuation, quantity, origin and duty and related charges assessment/calculation as required by the Government for which BIVAC is being contracted and inspection fees paid by importers to conduct pre-shipment inspection. Discrepancies that may arise after inspection and shipment with container sealed resulting from BIVAC’s error or failure to do due diligence should be attributed to BIVAC and not to chase after the importers.

Further, referring to Destination Inspection (DI) regime, it is further recommended that declaration into the ASYCUDA database should be made after physical inspection at Customs-BIVAC DI site and the valuation process must take into account importers’ invoices and the transaction processes in the countries of export instead of only relying on BIVAC’s obsolete database Count 1.0 (g) “Address issues of CET and Protective Tariff Tax” by this we refer to the concomitant use of two (2) tax instruments, namely, “the Harmonized System and Customs Tariff Schedules 2012” and the ECOWAS Common External Tariff (CET) without adequate public tax awareness and/or migration plan circulated or published in newspapers for certain commodities that are being selectively assessed by LRA under the 2012 tariff regime.

It is recommended that the CET be applied holistically with reference to Section 3 (e) of the Revenue Code of Liberia quoted as follows: “Where an international agreement ratified by the Legislature has entered into force and establishes rules inconsistent with those provided by this code, the international agreement takes priority over and supersedes this code to the extent of the inconsistency.”

We further refer to LRA’s arbitrary increase in excise tax rate of tobacco from 35% to 80% and GST from 7% to 10% on November 1, 2016 when there was no law to the effect at the time. A tax refund for excess tax payment on imports from November 1 to December 22, 2016 is hereby recommended to be made to the importers concerned.


This section discusses the taxation in to the Neoclassical Growth Theory and then the impact of taxation on capital accumulation, and the impact of taxation on human capital.

Taxation In to the Neoclassical Growth Theory

According to Kotlán, Machová and Janíčková, (2011:638), when economists decide to evaluate the impact of fiscal variables on economic growth, they explain through the fact taxation influences economic growth only through its impact on individual growth variables.

Growth theories can be considered as essential in this evaluation, and it is therefore necessary to introduce, at least in short, their substance and to describe the channels of taxation impact on the economic growth. If we consider the work of pioneers like Solow (1956) and Swan (1956:334), it can be said that their work on neoclassical growth model can be considered to be the turning point within the researched on economic growth. In the contrary, if we analyse the economic growth from the long-term view and due to the decreasing marginal product of capital, every economy aims towards the steady state in which it is not possible to increase output per one worker (Duczynski, 2003:39).

Only technology advancement, which is exogenous in this model, secures the change of the product growth per worker. Romer (1986:1002) and Lucas (1988:3) made technology advancement endogenous by repeatedly defining the term capital. In this case, the capital consists of physical and human form. Especially investments into human capital represent the source of long-term economic growth, or they slow down the convergence of economies towards the steady state. Judd (1985:59) was one of the first who dealt with the productivity of government spending and its impact on economic growth in connection to its financing by various types of taxes, while Barro (1990:103) continues the research on the model through national tax burden.

Further, King and Rebello (1990:126) analyse the reasons for disparity existence among individual countries within long-term economic growth and found that these disparities lies in different tax policies which influence incentives of individuals to accumulate capital in both its forms; physical and human. In their analysis they worked with the neoclassical growth model where they pointed out the significant effect of the impact of national taxation to the rate of long-term economic growth. King and Rebello (1990:129) argued that national tax policies can have a big influence on average rate of economic growth of isolated economies because they influence private incentives for accumulation of physical and human capital. These motivation effects of taxation are strengthened in open economies which have an access to international capital markets where even a small tax changes can result in stagnation of economy. The authors also said that the impacts of national taxation also depend on the aspects of technology production for new human capital. Finally, King and Rebello (1990:127) concluded that the fact that the tax policies have the potential to influence the growth rate in a long-term horizon so then there is a bigger quantitative impact of these policies on the welfare. Therefore, we can say that tax burden represents a significant factor which influences economic growth and ultimately also the social welfare which is the top objective of any economic policies. When evaluating the impact of taxation on economic growth, it is necessary to realize that taxation can be integrated into growth theories only through its impact on individual growth variables (Kotlán, 2010; Kotlán, Machová and Janíčková, 2011:640).

Impact of Taxation on Capital accumulation

Taxes have an impact on capital accumulation. Daniel and Jefferey (2013:245) and Dwenger (2009) argued that corporate taxation lowers the return of invested capital and also the structure of capital or age of a company (Pfaffermayr, Stockl and Winner, 2008). In the same line of thought, some researchers found that there is a negative relation between corporate taxation and foreign direct investment (FDI) (Schraztenstaller, Wagener and Kohler-Toglhofer 2005:96); Feld and Heckemeyer (2008).

However, Brebler (2012) realised that if a country decides to lower its taxation rate, it will positively influence FDI inflows. In the context of globalization and significant mobility of factors, Adina (2009) evaluated the impact of tax policy on entrepreneurs and their localisation decisions.

The results of the analysis show that when it comes to the investment localisation, taxation plays an important role in the investor’s decision making. However, the investor must take into account other investment aspects, such as infrastructure, workforce availability and legislation just to name these three. Becker (2009) works with the qualitative investment aspect and argues that the growth of corporate taxation results in a decrease of tax revenues due to the lower inflow of FDI into a given economy.

According to the author, potential investors ignore other advantages and characteristics of domestic economy such as infrastructure, market availability and politic stability, because high corporate tax burden discourages potential investor from the investment realisation in a given country.

Foreign entrepreneur’s decision making about investment in any given country is also influenced by the labour taxation. Alesina et al. (1999) argued that the main reason for this fact is that the growth of labour tax rate leads to the employees’ effort to get salary increase at a certain level before the taxation that can potentially also leads to the decrease of work supply in that given country.

Therefore, policy makers can pressure companies to lower their profits, and consequently their investment. Feld and Kirchgässner (2001) and Overesch and Voeller (2010), state that high labour taxation discourages companies from localizing their investment, and at the same time it affects the structure of capital accumulation. The negative impact of the aforementioned channels of labour taxation on economic growth is verified in the work of Dackehag and Hansson (2012). Capital allocation or entrepreneur’s investment decision can be influenced also by the consumption taxes. Salanié (2003) states that when a risk is absent, this type of taxation has the same impact on investment as labour taxes.

Impact of Taxation on Human Capital

In the growth model or theory, human capital is another factor which is influenced by taxation. Because of growing marginal product, human capital has such an effect that investment into education is effective in economies which are in the steady state. A positive relation between investments into human capital and long-term economic growth was confirmed in many studies (Jones and Manuelli, 2001; Teixeira and Fortuna, 2003).

Lin (2001) argues that a positive dependency can only exist between economic growth and taxation if revenues from taxes are used only for human capital accumulation. Companies that invest into their employees’ capacity building and training only once, usually in the first period of the employee’ recruitment (Becker, 1993).

However, when companies invest into human capital, they must differentiate between the general and specific capital. In fact, general capital can be utilized by employees at other employer, but they do not bear any investment costs and the employer can therefore afford to pay the employee a higher salary corresponding to higher labour productivity. Because of the above, companies require that spending connected with investments into general human capital be taken up by the employees themselves (Kotlán, Machová and Janíčková, 2011).

In fine, it is necessary to realize that human capital is typical for its illiquidity, highly risky, and presents insufficient level of certainty according to Grochulski and Piskorski (2007). Because of these reasons that financial institutions provide funds for investment into human capital only in a small rate due to the fact that tax reliefs are the most important motivation element for the employer to invest in human capital (Jacobs, 2007).


The aim of this paper was to evaluate the impact of individual types of taxes on economic growth by carrying out a regression analysis. As far as mutual absolute comparison of taxation impact on economic growth is concerned, it is obvious that corporate taxation harms the most, and is followed by personal income taxes and social security contributions. In the case of World Tax Index, it is followed by value added tax. Since economic growth is one of the fundamental economic objectives of the economic policy makers and it is the basic assumption of fulfilling other social objectives, the following can be stated resulting from this paper. In their effort to stimulate economic growth, countries like Liberia should try to lower taxation rate in the case of corporate taxation, personal income taxes and social security contributions. Further, the outage of tax revenues caused by the decrease of income taxes should be compensated by an increase of indirect taxes.

According to the World Bank (2019), some possible quick wins include the following for taxation collection through the exploitation of natural resources:

  • The strengthening of tax administration enforcement of existing laws pertaining to natural resource taxation;
  • The strengthening of audit capacity of the LRA, in particular for audit of the companies working in natural resource sectors;
  • The strengthening capacity of the LRA to conduct transfer pricing audits and utilize global exchange of information arrangements;
  • The creation of a data base of present tax incentives and tax expenditures granted through executive orders and decrees;
  • The review of all tax exemptions and tax expenditures in terms of economic and commercial rationale at the time granted and presently, and estimate foregone revenues to the budget;
  • The elimination or the phase out of economically unjustified tax incentives where possible;
  • The enforcement of filing and payment of Corporate Income Tax and ensure a unified CIT declaration is in place regardless of the mode of filing.