Revenue Productivity of the Tax System in Ethiopia
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Date
1998-05
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Addis Ababa University
Abstract
This paper studies the role played by built-in- ~'( ela tic ity and di cretionary tax
measures in the government's effortS to reduce the budget deficit and finance
development in Ethiopia. The estimation results demonstrate an income inel as tic tax
system. Analysis of the components of the overall tax elasticity brings out the generally
low value of the tax-to-base relative to base to income as a key factor in explaining the
low elasticity of the tax system. The main reason for the low tax-to-base elasticity is
inefficient and poor tax administration and the existence of large exemptions . Therefore
the increase in total tax revenue has been mainly due to discretionary tax measures . The
DTMs were found to be an effective policy instrument both for raising additional
revenue and for of effecting a shift from the taxation of international trade to the
taxation of domestic transactions . These results have important implications for tax
reform. There is a need to evolve an elastic tax structure since it implies that tax
collections will grow automatically with the growing economy without resorting to
frequent, potentially sensitive discretionary changes in tax structure . This mainly
requires establishing a strong tax administration, reducing or eliminating exemptions,
introducing lower rates, and broadening Ll}e tax base.
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Keywords
Revenue Productivity, Tax System in Ethiopia