Revenue Productivity of Tax Reform and Growth in Public Expenditure in Ethiopia
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Date
2012-06
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A.A.U
Abstract
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.
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Keywords
Public Expenditure, Tax Reform