DETERMINANTS OF TAX REVENUE IN ETHIOPIA

Abstract

The main objective of this study is to empirically examine the major determinants of tax reve nue in Ethiopia for the period ranging from 1975-2013, using Johansen maximum likelihood co-integration approach. The result revealed that level of real GDP per capita income, infla tion, foreign aid and industrial share of GDP are significant variables that determine tax rev enue in the long run. Moreover, in the long run real GDP per capita income, foreign aid and industrial value added share of GDP positively and significantly affect tax revenue as per centage of GDP. However, inflation exerted a negative and significant influence. Whereas, in the short run only the level of real GDP per capita income, industrial value added share of GDP and inflation rate are statistically significant in determining tax revenue percentage of GDP. Real GDP per capita income and inflation have negative effect, whereas industrial Value added share of GDP has positive effect in the short run. The sign of real gross domestic product per capita income is contrary to the priori expectation. Moreover, the coefficients of the lagged error correction term (ECM (-1)) is significant and negative as expected, which imply the existence of economic or government forces that restore the long run equilibrium from short run shocks. Finally, the study recommends measures such as a boost in per capita income growth, structural transformations, introduction of new tax bases and efficient utili zation of foreign aid inflow have to be considered by the concerned bodies so as to bring efficient tax administration and enhance revenue growth. Moreover, the government shall give a due recognition to the development of the industrial sector.