Determinants of Tax Revenue in Ethiopia

Abstract

Abstract:Fiscal deficit is the core issue of most of the developing countries over the past several decades. The reason behind the large increase in fiscal imbalance is the rapid expansion in expenditure and low revenue collection. Hence, efficient tax system is crucial for these countries. Since Ethiopian is one among developing countries, pattern of tax revenues and economic growth across country has become a significant concern. Due to aforementioned deficiencies, Ethiopia struggles with budget deficits for a long time. The focus of this paper is to identify determinants of tax revenue in Ethiopia by using a secondary data and multiple variables regression model using OLS method. Quantitative research method was employed on time series data set for the years 1999/00 to 2015/16. Both descriptive statistics and econometric tools were employed to analyze and present the data collected from concerned bodies. The finding reveals that, industry sector share to GDP, per capita income and trade openness as measured by share of export and import to GDP have significant positive effect on tax revenue whereas; agriculture sector share to GDP and annual rate of inflation have significant and negative effect on tax revenue as measured by share of tax revenue to GDP.

Improving Tax Revenue Performance in Tanzania: Does Potential Tax Determinants Matters?

“…The variables FDI share revealed negative coefficient of nearly of 0.23% and significantly; this is an unexpected result for developing country like Tanzania. However, these findings also aligned with previous studies Castro and Camarillo [1], Gorbachev et al [14]. During economic reform and trade liberalisation in 1990's, foreign direct investment policy structured with an excessive tax exemption for short and long-term which benefit foreign investors greatly for paying little or no tax.…”

“…Results in manufacturing share were expected and aligned with previous studies, Chaudhry and Munir [4], Castro and Camarillo (2014) [1], Gobachev et al [14] who found manufacturing share has a positive effect with tax performance. The manufacturing sector is among the essential sectors in boosting economic growth that claimed to associate with an increase in tax revenue performance.…”

“…Openness to international trade affects tax performance with the coefficient value of 0.588, and insignificantly, it aligned with several previous researchers who support capacity of tax collection is associated with trade openness due to access of imposing a tax on import or export of any product easily. Chaudhry and Munir [4], Gorbachev et al [14]. Policymakers shall continue to create a conducive environment and focus on modern technique on promoting export trade especially with those countries whose consumption products are available in Tanzanian.…”

“…Emphasised on Arab countries to increasing tax revenue instead of rationing expenditure while Tunisia, Algeria, Morocco and Sudan suggested reforming the tax system. Gobachew et al [14] investigated the determinants of tax revenue in Ethiopia and results revealed agriculture share and inflation are statistically significant and negatively affect tax revenue, the industry share and trade openness revealed significant and positive affects tax performance, foreign direct investment found insignificantly and negatively affect tax revenue. However, Ethiopian's tax performance indicate promising, but the GDP ratio remained low which attract enhancement of tax revenue performance.…”

Gross Domestic Product Per Capita and Individual Income Tax Revenue: Empirical Evidence from Vietnam

“…With forty two years data in Nigeria, the research result shows that the main determinants of tax revenue are the level of change in income, rate of inflation and exchange rate [10]. Another research used time series data set for the years 1999/00 to 2015/16 and the results find that in constant condition of other factors, a 1% increase in real GDP per capita income results in approximately raise in tax revenue percentage of GDP by 0.20 percent [11]. This means that GDP per capita income has a positive and significant effect on tax revenue.…”