Journal of Economics and Sustainable Development www.iiste.org ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.5, No.17, 2014 10 Causal Relationship between Government Tax Revenue Growth and Economic Growth: A Case of Zimbabwe (1980-2012) Dzingirai Canicio, Tambudzai Zachary Department of Economics, Midlands State University, Zimbabwe P Bag 9055, Gweru, Zimbabwe Corresponce: Dzingirai Canicio, Department of Economics, Midlands State University, Gweru, Zimbabwe. E-mail:Dzingiraic@msu.ac.zw and caniciod@yahoo.com Abstract The main aim of the paper is to demystify the mystery surrounding the belief that, high tax revenue growth rates is a prima facie and a leading indicator for high standards of living as a result of high economic growth rates engineered through the government multiplier process. The effects of economic growth on government tax revenue growth were investigated for Zimbabwe during the period of 1980-2012. Short-run and long-run relationship between the tax revenue and economic growth in Zimbabwe were also investigated. Theoretically and empirically it has been found that taxes affect the allocation of resources and often distort the economic growth. The study applied the Granger Causality test, Johansen’s cointegration test and vector error correction model to serve the purpose. However, findings of this study clearly showed that there is an independence relationship between economic growth and total government tax revenue with 30% speed of adjustment in the short run towards equilibrium level in the long run. This implies that there is fiscal independence between tax revenue and growth. The empirical analysis also provides the evidence of long-run equilibrium relationship. Based on the findings, we highlighted some of major issues that policymakers should consider for effective taxation policy formulation and implementation in line with the complexity nature of the Zimbabwe economy. Therefore, the outlook is that the economists and policy makers should suggests an ideal, efficient and buoyant tax system so that gross tax revenue of the government would increase substantially thereby leading to optimum mobilization of resources for higher economic growth of the country. This can only be achieved through efficient allocation of collected tax revenue to production sectors of the economy to try to achieve distributive principle through societal welfare maximization. 1. Introduction Taxation is central to development and provides governments with the funding they require to finance economic development and growth. In any country, developed or less developed, mobilization of resources constitutes a paramount aspect of achieving a higher level of economic growth. And, as a source of resource mobilization, the role of tax revenue is very significant in developing countries such as Zimbabwe. Understanding the causal relationship between government tax revenue and economic growth is important from a policy point of view, especially for a country like Zimbabwe, which is suffering from persistent budget deficits, retarded economic growth, whilst tax revenues are rising. Theoretically, social infrastructure investment, however, must be financed, usually through taxation or budget deficits. In a closed economy with government, the resources come at the expense of crowding-out consumption or private savings, while an open economy allows the option of external borrowing. These costs, compounded by the dead-weight loss of distortionary taxation, can jeopardize the positive growth trajectory of the social infrastructure investment. An optimal policy balances the sustained positive growth and distributional effects of social infrastructure investment against the full economic costs imposed by taxation and/or increased indebtedness. The paper intent to demystify the mystery shrouding the fallacial belief that, high tax revenue growth rates is a prima facie and a leading indicator for high standards of living as a result of high economic growth rates engineered through the government multiplier process. The main objective was achieved by investigating the long-run and short run causal relationship between the tax revenue growth and economic growth in Zimbabwe and ascertaining the speed of short run adjustment towards the long run equilibrium. During the 1950s and 1960s, many economists prescribed that greater government intervention was the best, if not the only way forward in achieving certain goals and objectives like poverty alleviation economic growth and development. However, in the 1980s and 90s there was growing skepticism concerning the achievements of governments’ targets in terms of revenue collection and allocation. In recent years, an emphasis on government failure has replaced the previous concern for the market failure. The dramatic success of the East Asian Newly-Industrialised Countries (NIC), widely referred to as ‘The Asian Tigers’, in achieving sustained growth unraveled conflicting evidence on the role of state intervention. To some, it clearly showed that these economies illustrated the effectiveness of the market based policies in promoting economic development, with Hong Kong being viewed as the prime example, in the case of five Asian Tigers. However, more recently the reality of the importance of market friendly state activism has been recognised, especially in respect of Singapore, South Korea, Japan, China and Taiwan. Thus the World Bank (2010) has argued that these countries