Determinants of tax revenue in Ethiopia

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. Literatures indicated that sectors of economy like agriculture, industry and service, FDI, inflation rate, public debt, per capita income and trade openness as main determinants of tax revenue. Hence this study is important to identify significant variables affecting tax revenue in case of Ethiopia. In this study quantitative research method using time series data set that consists of seventeen years has been used. The time period covered was 1999/00 to 2015/16; this is primarily due to unavailability of organized data before the indicated period. Both descriptive statistics and econometric tools were employed to analyze and present the data collected from concerned bodies. In this study, classical linear regression assumption test have done in order to assess fitness of the model. The findings from this study 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. The regression result also indicates as foreign direct investment has negative effect on tax revenue but it is not significant. Finally based on these findings the study forwarded recommendation and policy implication that will help Ethiopian government to enhance its tax collection performance.