Empirical Analysis of the Contribution of Vat for Economic Development and Social Spending in Ethiopia
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Date
2011-06
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Addis Ababa University
Abstract
This paper discussed some recent critical literature on value-added tax (VAT) in Ethiopia
relating to its contributions for economic development and its impact on the Social
Spending in Ethiopia. The study employed the tools of quantitative empirical analysis
technique to evaluate the contribution of VAT for the development of Ethiopia economy.
The generic central objective is to examine the contribution of VAT for the development
of Ethiopia economy and its impact on social spending, equity. The tools of empirical
analysis used are multiple regression models as abstractions of the respective sectors
considered in the study and also descriptive statistics. The study considered a vector of
economic development indicators as dependent variables and regressed each on VAT
revenue proceeds and other income (loan, donation, grant, taxes excluding VAT revenue,
and others) of Ethiopia State for the study period (1995-2002 E.C. or 2003/04 – 2009/10
G.C.). The state economy is disaggregated into five strategic economic sectors in the
development process, and multiple regression models specified to enhance isolated analysis
of each sector. Development aspects that are considered
development,
education
sector
development,
agricultural
include
infrastructural
and natural resource
development, health sector development and other development sectors. Moreover, in
order to make clear decision and summarize the study, the summation of all capital
expenditure on the respective sectors were taken and regressed. The analysis showed that,
except education sector, VAT revenue contributed positively for the development of the
respective sectors. On the aggregate (model VI), the analysis showed that VAT revenue
had a considerable contribution for t h e development of the economy during the period
under study. However, the contributions are statistically significant only to health and
agricultural and natural resource development sectors. Therefore, it can be said that, the
VAT tax revenue was unable to neutralize the regressivity of VAT tax levy in Ethiopia
because its unsystematic exemptions, tax structure, and tax system.
Thus, the study concludes that various sectors of the economy of Ethiopia are yet to
benefit significantly from VAT revenue expenditure of the state government.
Consequently, the paper calls for equity in sectoral spending of VAT proceeds in
Ethiopia State in order to ensure balanced development and sustainability of the emerging
mega city status of the state
Description
Keywords
Development and social spending in ethiopia