Applied Economics Letters

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The impact of sales tax on economic growth in the

United States: an ARDL bounds testing approach

J. F. Li & Z. X. Lin

To cite this article: J. F. Li & Z. X. Lin (2015) The impact of sales tax on economic growth in the
United States: an ARDL bounds testing approach, Applied Economics Letters, 22:15, 1262-1266,
DOI: 10.1080/13504851.2015.1023933

To link to this article: https://doi.org/10.1080/13504851.2015.1023933

© 2015 The Author(s). Published by Taylor &

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Published online: 05 May 2015.

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Applied Economics Letters, 2015
Vol. 22, No. 15, 1262–1266, http://dx.doi.org/10.1080/13504851.2015.1023933

The impact of sales tax on

economic growth in the United
States: an ARDL bounds testing
approach
J. F. Lia,b,* and Z. X. Linb
a
Management Science and Engineering, Dalian Maritime University,
Dalian City, 116026 China
b
Rawls College of Business, Texas Tech University, Lubbock, TX, USA

This article investigates the impact of sales tax on economic growth

in the United States during the 1960–2013 period using the autore-
gressive distributed lag bounds testing approach of cointegration. We
estimate the long- and short-run elastic coefficients of sales tax on
growth and find that economic growth in the United States responds
negatively to sales tax in the long run, although it produces positive
effects in the short run.
Keywords: ARDL; bounds testing approach; sales tax; economic growth
JEL Classification: H2; C1

I. Introduction Whalley and Zhao (2013) investigated the influence

Recently, many academics and policy makers have
emphasized the relationship between taxation and
economic growth. For instance, Dalamagas (2003)
provided a quantitative evaluation of the relationship
between tax polices, growth and tax revenue in an
econometric framework. Mamatzakis (2005) ana-
lysed the dynamic responses of growth to tax struc-
ture in Greece and noted that output growth
responded negatively to an increased tax burden,
but a tax mix produced a positive impact.
Stallmann and Deller (2010) explored the effects of
local and state tax and expenditure limitations
(TELs) on economic growth in the United States
and found that TELs had no significant effects.
of China’s stimulus package and tax stabilization
efforts in response to the 2008 financial crisis and
concluded that the tax resulted in more contributions
than expenditures during the period investigated.
In those studies, governmental tax was consid-
ered an important factor that affects economic
growth. Nonetheless, there has been insufficient
research on the effects of sales tax. The sales tax
is an important taxation scheme that is popular in
the United States. In a sales tax scheme, the
customer pays sales tax when making almost
any purchase. Its influence must be investigated
thoroughly to inform US policy makers as well as
to be instructive for other countries’ policy
makers to some extent.

*Corresponding author. E-mail: Jianfeng_li@dlmu.edu.cn

1262 © 2015 The Author(s). Published by Taylor & Francis.

This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives License (http://creativecommons.
org/Licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited, and
is not altered, transformed, or built upon in any way.
Sales tax and economic growth
II. Data and Methodology
This study investigates the 1960–2013 period in the
United States and examines GDP and sales tax (thou-
sand millions of dollars), employing annual data from
the BEA in the US Department of Commerce. We
choose the annual per cent change in GDP as our
indicator of economic growth (EG), and we attempt to
find the received impact on EG from sales tax (STax), as
shown in Equation 1.
EG ¼ f ðSTaxÞ (1)
where EGt = (GDPt /GDPt–1–1) ×100, t denotes
the year.
We adopt the autoregressive distributed lag (ARDL)
bounds testing approach of cointegration developed by
Pesaran et al. (2001) to examine that nexus. The ARDL
approach has several advantages, including the follow-
ing: (1) the underlying regressors are not restrictive
irrespective of pure I(0), pure I(1) or mutual cointegra-
tion; (2) both long- and short-run relationships are easy
to investigate and applicable to the type of investigation
in the ARDL approach and (3) cointegration in small
samples is more fitful to determine (Brahmasrene and
Jiranyakul, 2009; Lamotte et al., 2013).
The ARDL procedure involves two stages (Pesaran
and Pesaran, 2009, p. 317). In the first stage, a condi-
tional error-correction model (ECM) is constructed to
examine the long-run relationship through an F-test,
which is shown in Equation 2:
dEGt ¼ C þ π EG  EGt1 þ π ST  STaxt1
X
p1
(2)
þ
0
ψ dZti þ ω  dSTaxt þ εt
i¼1
where p denotes the lag;
C is the intercept;
d is the difference operator;
t denotes the year;
εt P(0, σ2), is white noise;
πEG, πST, ψ’ and ω are coefficients;
Zt = (EGt, STaxt)’.
The null hypothesis is the following: H0 –
πEG = πST = 0. The computed F-statistic for cointegra-
tion is denoted F(EG/STax). Pesaran et al. (2001) tabu-
lates two sets of critical values: I(0) and I(1). If the F-
statistic lies below the lower bound I(0), the null
hypothesis H0 cannot be rejected, which means that
there is no cointegration in the levels between the
1263
included variables. Otherwise, if the F-statistic exceeds
the upper bound I(1), H0 can be rejected, and there is a
relationship in the levels or cointegration for the vari-
ables in the long run. If the F-statistic falls between I(0)
and I(1) as bounds, the inference cannot be conclusive.
If the cointegration between EG and STax is tested
with evidence, the ARDL model with optimal lags is
determined at the second stage after searching (p + 1)1+1
ARDL models, according to the AIC or Schwarz
Bayesian criterion (SIC), which is shown in Equation 3:
ϕðL; p0 ÞEG ¼ C0 þ βðL; q1 ÞSTax þ μt (3)
where
ϕðL; p0 Þ ¼ 1  ϕ1 L  ϕ2 L2      ϕp0 Lp0
βðL; q1 Þ ¼ β0 þ β1 L þ β2 L2 þ    þ βq1 Lq1
L is the lag operator such that LiSTax = STaxt-i. In the
long run, we have EGt = EGt–1 = . . . = EGt–p0;
STaxt = STaxt–1 = . . . = STaxt–q1. Thus, the long-run
equation can be obtained as follows (Equation 4):
EG ¼ Const þ β  STax þ vt (4)
where
Const ¼ C0 =ϕð1; p0 Þ;
β ¼ βð1; q1 Þ=ϕð1; p0 Þ;
vt ¼ ut =ϕð1; p0 Þ:
At this point, the short-run dynamic equation with
an error-correction term can also be written as
follows (Equation 5):
pX
0 1
dEGt ¼ dConst þ βpi  dEGti
i¼1
qX
1 1
þ βqi  dSTaxti þ βe  ecmð1Þ þ ut
i¼0
(5)
where ecmt = EGt – Const – β· STaxt.
Thus, through the long-run coefficients, we can see
the contribution of STax to EG. Furthermore, the speed
of adjustment can also be shown clearly in the dynamic
1264 J. F. Li and Z. X. Lin
short-run model such that the error-correction term ecm Hence, the underling ARDL model can be estab-
should be statistically significant and negative. lished to determine the long-run slope-estimated
coefficients and the short-run dynamic-estimated
coefficients. The ARDL(1,1) is selected based on
III. Empirical Results SIC, and the estimated results are shown in Table 2.
The empirical results are satisfactory. The F-stat F
In the ARDL bounds test, the variables are required (2,48) is 28.0835, and the probability of the null
as I(0) or I(1), or else the result may be spurious. We hypothesis for no significance in that regression is
adopt the ADF to determine the difference levels of [0.000]. The DW-statistic (d) is 1.9058. Because
EG and STax and find that they are I(0) and I(1), both d and (4–d) > dU,0.01(1.45), there is no statistical
respectively. Thus, we compute F-statistics to test the evidence that the error terms are positively or nega-
long-run relationship in which the maximum lag tively autocorrelated (Durbin and Watson, 1950,
length p is 2 in the ECM. The results for the bounds 1951). Furthermore, the T-ratios for those regressors
for the F-test in Equation 2 are shown in Table 1. are also meaningful, and their probabilities are below
α(0.01). Thus, the null hypothesis βi = 0 is rejected,
Table 1. Results for the bounds of the F-test and those regressors are significant even at a confi-
F(EG/STax): 7.9753* dence level of 99%.
Thus, the long- and short-run ARDL relationships
Lower I(0) Upper I(1) are estimated clearly. The long-run elasticity of STax
1% level 6.84 7.84 contributing to EG is −0.018963 for the United
5% level 4.94 5.73 States from 1960 to the present. Thus, we show that
10% level 4.04 4.78 STax has a negative effect on EG in the long run.
However, in the short run, the coefficient of the
Source: Asymptotic critical values are obtained from
Pesaran et al. (2001): Table CI(iii) Case III: Unrestricted regressor dSTax on the dependent variable dEG is
intercept and no trend. 0.14109 and is positive, which means that an
Note: *Significance at the level (α = 0.01). increase in the sales tax can push economic growth

Table 2. The long- and short-run ARDL relationships

The ARDL long-run relationship (depended variable EG):
Regressor Coefficient SE T-Ratio[Probability]
STAX −0.018963 0.0026169 −7.2464[0.000]
CONST 8.4708 0.57114 14.8314[0.000]
The ARDL short-run relationship or error-correction model (dependent variable dEG):
dSTAX 0.14109 0.032621 4.3253[0.000]
dCONST 6.2509 1.1187 5.5875[0.000]
ecm(−1) −0.73793 0.11389 −6.4794[0.000]
List of additional temporary variables created:
dEG = EG-EG(−1)
dSTAX = STAX-STAX(−1)
dCONST = CONST – CONST(−1)
ecm = EG + 0.018963 × STAX − 8.4708 × CONST
R-squared 0.54443 R-bar-squared 0.51535
SE of regression 1.7243 F-stat. F(2,48) 28.0835[0.000]
Mean of dependent variable −0.078498 SD of dependent variable 2.4768
Residual sum of squares 139.7354 Equation log-likelihood −98.0680
AIC −102.0680 Schwarz Bayesian criterion −105.9316
DW-statistic 1.9058

Note: The results were calculated using the Microfit software developed by professor Pesaran, M. H. and Pesaran,
B. @ Oxford University Press.
Sales tax and economic growth
in the short term, which is different from the long-run
effects of a sales tax. The equilibrium error-correc-
tion coefficient ecm(−1) is −0.73793, which has the
expected negative sign. Its T-ratio is −6.4794, and the
probability of the null hypothesis being true for zero
is [0.000], which is significant even when α = 0.01.
Thus, it can also be concluded that the adjustment is
quite meaningful in the short-run ARDL
relationship.
IV. CUSUM and CUSUMSQ Tests
To further confirm the stability of the estimated
ARDL model, we use the cumulative sum
(CUSUM) and the cumulative sum of squares
(CUSUMSQ) test method to examine the recursive
residuals, which are shown in Figs 1 and 2.
The straight lines represent the critical bounds
at the 5% significance level. When the CUSUM
and CUSUMSQ of the recursive residuals move
outside of these two straight lines, the null
hypothesis of instability is accepted. However,
both the CUSUM and CUSUMSQ remain within
the area restricted by the lines; thus, the estimated
ARDL model is effective with stable recursive
residuals.
Fig. 1. CUSUM of recursive residuals
Fig. 2. CUSUMSQ of recursive residuals
1265
V. Conclusion
This article has explored the impact of sales tax on
economic growth in the United States during the
1960–2013 period. The novel feature of this study
is to investigate the influence of sales tax, and we
determined its long- and short-run relationships
with growth. We show that economic growth in
the United States responds negatively to sales tax
in the long run, although sales tax does produce
positive effects in the short run. The long-run
slope coefficient is −0.018963, the short-run
dynamic coefficient is 0.14109 and the speed of
adjustment is −0.73793. The estimated ARDL
model is effective even with the regressors at sig-
nificant levels and with stable recursive residuals.
The results should be helpful for policy makers in
the United States and instructive for policy makers
in other countries to some extent.
Acknowledgements
The authors would like to thank their peer reviewers
for commenting on this article.
Funding
This work was performed under a grant from the
China Scholarship Council [201308210003].
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