The Impact of Tax Reform on the Revenue Productivity of the Ethiopian Tax System
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Date
2017-06
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Addis Ababa University
Abstract
Ethiopia faces difficulty in raising tax revenue to the level required for the promotion of
economic growth and development. To address these fiscal challenges, the government of
Ethiopia has initiated a sequence of tax reforms. The evaluation was made in to two different
categories. The first category dealt with the whole period (1974/75 – 2013/14) to evaluate the
impact of tax reform on revenue productivity of Ethiopian’s overall tax system and major tax
categories on the basis of tax buoyancies and elasticity which particularly emphasized on the
1975, 1992, and 2002 tax reform. The second category was compared with total tax revenue
buoyancy of the Derg regime period (1974/75-1991/92) and the Ethiopian People’s
Revolutionary Front (EPRDF) period (1992/93-2013/14).The two step Engel- Granger method
of measuring revenue impacts of discretionary tax measures by means of single equation
econometric model is adopted and Ordinary List Square (OLS) estimation techniques is used.
Evidence suggested that the overall tax system in Ethiopia during the period under study was
income inelastic and this means that the attained growth in national income spurred a less than
proportionate automatic increase in national tax revenue and this inelasticity of the overall tax
system is found to be mainly due to low tax- to- base elasticity of individual tax. Relatively low
tax-to-base elasticity may be explained by inefficient and poor tax administration and the
existence of high exemption. Moreover, the regression results revealed that the estimate of
buoyancy of the indirect tax in general and foreign trade tax in particular is higher during
EPRDF period compared to Derg period. Eventually, the finding suggests that tax reforms had
an overall positive impacts on tax responsiveness through more effectively increased elasticity of
the base-to- income component and less effectively through the lower elasticity of the tax-to-
base component. Despite this positive impact, tax reforms failed to make the tax system
responsive to income change. Hence the study make recommendation on the direction of
improved response of tax-to-base, establishment of a strong tax administration to increase tax
collection, reducing exemption, broadening the tax base and bringing new tax payers in to tax
net.
Key words: tax reform, tax productivity, tax base, buoyancy, elasticity, structural measures
Description
Keywords
Tax reform, Tax productivity, Tax base, Buoyancy, Elasticity, Structural measures