The Impact of Tax Revenue on Economic Growth in Ethiopia

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Addis Ababa University


The main objectives of the study is to examine the long run and short run impact of tax revenue on economic growth in Ethiopia using GDP per capita, as a proxy for economic growth over the period 1990/91to 2019/20. The trends of tax revenue and GDP per capita growth rate of Ethiopia is fluctuating during specified time of period. ARDL and ECM methods are used for the study. The results of the Bound test suggests that there is long term correlation with GDP per capita, tax revenue, trade deficit, and real effective exchange rate. The result of ARDL models indicates that estimated coefficients, tax revenue, is significant effect on economic growth and their signs are consistent to the existing theories. The finding of this study concerning long run positive impact of tax revenue on economic growth is consistent with the endogenous growth models. In short-run, the estimated short-run model indicates that tax revenue is significantly positive impact on GDP per capita at 5% significance level. The findings of the research have an important policy implication. The result of trends of tax revenue and GDP per capita growth rate of Ethiopia during the study periods are fluctuating so it recommended that Ethiopian government should take appropriate measures that makes tax revenue and GDP per capita growth rate lower fluctuating trends. In order to increase economic growth, it is important to strengthen the taxation system. Firstly, Tax authority should build strong and stable tax institution and encourage volunteer taxpayers. Secondly, Policy makers should build a secure business atmosphere for taxpayers to raise tax revenue. Finally, government revenue and government expenditure must goes in parallel ways, so government establish strategies that encourage distortionary taxation and productive government expenditure. There are several further research direction Firstly, the study did not consider some variables, like illegal trade, contraband trade, tax evasion and informal sectors activities. Secondly, macroeconomic variables such international trade, inflation rate, and remittance that directly affect economic growth but cannot included in the model so this can be an opportunity or further research directions.



Ethiopia, Economic Growth, Tax Revenue, ARDL Method, Bound Test, ECM Model