Determinants of Tax Revenue Performance in Ethiopia
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Date
2017-02
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Addis Ababa University
Abstract
The development of any nation depends on the ability of the government to generate sufficient
amount of revenue from its own internal source of finance. Tax is the most efficient and
effective tools of fiscal policy in the world through which a government is able to supply a
variety of social and welfare services. Many developing countries face fiscal deficit due to low
tax collection performance. Similarly, Ethiopian tax collection performance is low as
compared to other sub-Saharan African countries and the trend of these taxes not consistent.
The main objective of the study was to identify determinants of tax revenue performance in
Ethiopia using time series data covering period from1980-2015. The variables used in the study
were inflation rate, exchange rate, unemployment rate, foreign direct investment, urbanization
rate as explanatory variables to explain the explained variable of tax revenue performance.
Multiple regression model and Vector error correction model (VECM) have been employed to
analyze the long run and short run relationship for the analysis and test the hypotheses developed
using ordinary least square. The stability of the data is checked and all the data are stationary by
differencing, beside all the CLRM assumptions were tested and none of the assumptions
violated in the study. Accordingly, the result of the regression model revealed that urbanization
rate, inflation rate and foreign direct investment have significant positive relationship with tax
revenue performance, whereas unemployment rate has significant negative relationship with tax
revenue performance in the long run. But exchange rate has negative insignificant effect in the
long run .Unlike the long run; only exchange rate has a significant positive effect on tax revenue
performance in the short. Finally, the study forwarded recommendation that enhance tax revenue
performance to incorporating all responsible organs under the tax system, improving labor market
to bring unemployment back down ,deepening currently followed market economy and expand
formal settlement and exhaustively working to track foreign investment.
Key words: Tax revenue performance, Unemployment rate, Inflation rate, Urbanization rate,
Exchange rate and Foreign direct investment
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Keywords
Tax revenue performance, Unemployment rate, Inflation rate, Urbanization rate, Exchange rate and foreign direct investment.