The Productivity of Tax System in Ethiopia (1961-2005)
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Date
2008-07
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Addis Ababa University
Abstract
This study evaluates the productivity of the tax system in Ethiopia for the period 1961-2005. It examines the role played by elasticity and discretionary tax measures in the government's efforts to reduce the budget deficit, and measures the income elasticity of the tax system by decomposing elasticity into tax-to-base and base-to-income elasticities.
The analysis shows that tax revenue tend to be inelastic with respect to changes in tax base. It is estimated that the tax-to-base elasticity is relatively lower than the base-to-income elasticities. The relatively low tax-to-base elasticity may be explained by inefficient and poor tax administration and the existence of exemptions.
A result of economic regression also indicates that the major tax categories together with the overall tax system possess a buoyancy coefficient that exceeds their respective elasticity coefficients.
The study makes policy recommendations in the direction of improved response of tax-to-base, improved alignment of taxes, and establishment of a strong tax administration, reducing exemption and broadening the tax base.
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Tax System in Ethiopia