Revenue Productivity of the Tax System in Ethiopia

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Addis Ababa University


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.



Revenue Productivity, Tax System in Ethiopia