Determinants and Challenges of Tax Revenue Performance in Ethiopia
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Date
2018-06
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Addis Ababa University
Abstract
It is a recognized fact that tax is the main component of government revenue that finances all the
government expenditure to meet public demands and stabilizes the economy. However, governments have
very different economic philosophies about taxation and they differ in the methods of collecting their tax
revenue. Tax has a primary function of raising adequate revenue to finance essential expenditures on the
goods and services provided by government. Nevertheless, in Ethiopia, the effort to raise adequate
revenue does not commensurate with the level needed for the economic growth. There are problems,
which the tax system faces in an effort to increase tax revenue collection. On top of this, the efforts to
identify the determinants of tax revenue performance in the country are rare. In light of this, the study has
addressed the determinants and challenges of tax revenue performance in Ethiopia. In doing this, the
study has adopted a mixed research approach with time –serious data analysis method. The study has
utilized both primary and secondary data collected from government offices and other sources. It has
taken 30 years macro-economic data on six explanatory variables (Inflation rate, trade openness, debt
share of GDP, investment share of GDP, expenditure on general education, current GDP) and
investigated their effect up on tax revenue performance in the country. Linear regression analysis is
followed to see the effects of explanatory variable on the dependent variable. Accordingly, the findings of
the study show that investment and debt share of GDP had significant positive effect on tax revenue
performance while the remaining variables had no significant effects. However, the model adequacy and
model fit show that the model is significant at 1% level of significant and it explains that 75% of the
variation in the tax revenue performance is attributable to the independent variables having significant
effect. Other variables, although insignificantly affect tax revenue performance, it is found from person
correlation test that they have relationship with the dependent variable. Inflation rate has a negative
relationship while current GDP, expenditure on education, and trade openness had positive correlation
with tax revenue performance. Besides, the study has found out that when one of the variables (current
GDP) is removed from the model, it comes that trade openness, investment share to GDP and expenditure
on general education have significant effect on tax revenue performance at 1% level of significance.
Concerning the challenges of tax revenue performance, it is found that lack of capacity building and
training programs. Low accountability system, corrupt practices, weak employees performance appraisal
and evaluation system, inadequate ICT infrastructure, and weak institutional complain handling and
resolution mechanisms are among the major challenges of tax collection in Ethiopian revenue and
Custom. Finally, based on the findings, the study has recommended that education is essential variable
for the tax revenue performance, so the policy maker should give further consideration to enhance the
knowledge of ERCA staffs and tax payers.
Description
A Thesis Submitted to the School of Graduate Studies of Addis Ababa
University in Partial Fulfillment of the Requirements for the Degree of Master
of Science in Accounting and Finance
Keywords
Debt share of GDP, Inflation rate, Tax Revenue