Revenue Productivity of Tax Reform and Growth in Public Expenditure in Ethiopia

No Thumbnail Available



Journal Title

Journal ISSN

Volume Title




The objective of this paper is to analyze the revenue productivity of the Ethiopian tax system and individual taxes in relation with tax reforms by estimating the coefficients of tax buoyancies and elasticity’s using OLS method for the sample periods of 1980/81- 2009/ 10. The aim of the tax reforms in the country mainly focus on generating more revenues to mitigate the perpetual fiscal imbalance and financing the increasing socioeconomic activities of the government. These objectives are achieved only through tax policies to make the overall taxes responsive to the changes in GDP. Results of the analyses reveals that the overall tax system is found out income inelastic both in the pre-and post-reform periods, the contributing factors for inelasticity are mainly low tax-to-base elasticity’s of most individual taxes besides the relatively better performance of base-to-income elasticity’s during the periods. The low tax-to-base elasticity’s are attributable to the sloppy tax administration, generous tax exemptions, tax evasions, the significant time lag between tax assessment and tax collection in an environment of rapid inflation; while better performance of base-to-income elasticity shows the capacity of the economy to generate additional revenues. The inelasticity of the tax system indicates that any increase in tax revenue is mainly due to DTMs rather than the automatic change in proportion to the growth in RGDP. Empirical evidences of this study suggests that, though it is not effective as expected, tax reform had a positive impact more on indirect taxes than direct taxes. These results call for better enforcement of tax laws and further improvement in the tax administration to increase tax collection and to struggle evasion and fraud.



Public Expenditure, Tax Reform