Tax revenue Determinants and Tax Efforts in Ethiopia from 2000 – 2019- ARDL Approach

Abstract

Despite increasing gross tax collection trends and reports of economic growth trajectory since 2005, the percentage of tax to GDP ratio has not shown significant improvement in Ethiopia. Ethiopia’s tax to- GDP ratio is far below the Sub-Saharan Africa average. Besides, the share of indirect tax has been consistently higher than direct tax over years. Several related studies on the determinants of tax revenue were conducted in Ethiopia. However, this particular study unlike the prior studies attempted to explain factors affecting tax revenue collection in terms of both structural variables and selected governance variables into account using the ARDL model. Accordingly, a stationarity test of the data and lag effect tests of the time series data from 2000 to 2019 were checked before the ARDL model selection using Stata. At the AR (4) level of the autoregressive process significant but negative ARDL values are observed for the agriculture, service, and industry sector as a share of GDP with an R-Squared value of 0.930. At this level, predictive variables such as inflation, government effectiveness, and control of corruption variables have shown no significant relationship. Thus, the fact that inflation and control of corruption have shown no significant relationship whereas industry and service as a share of GDP have shown a negative relationship requires further explanations. From selected governance variables both government effectiveness and control of corruption have shown no significant relationship whereas regulator quality has shown a significant but negative relationship. Accordingly, improving tax efforts focusing on the industrial, service sector and continually re-examining the tax administration effectiveness merit more regulatory organs attention.