MACRO-ECONOMIC DETERMINANTS OF TAX REVENUE IN ETHIOPIA: A TIME SERIES ANALYSIS

Abstract

The purpose of this study is to investigate the major determinants of tax revenue in Ethiopia from the period 1985 to 2016. Descriptive statistics and time serious econometrics model were used to analyze the data. The descriptive statistics,resultswere found to be in line with different literatures. Accordingly, GDP, industry share %GDP and trade openness have a positive relation with tax revenue collected. Whereas, agriculture share %GDP and inflation rate are found a negative relation with tax revenue. The study employs a Vector Error Correction Model (VECM) to co-integration in order to investigate the long-run and short-run relationship of the dependent variable i.e. tax revenue with GDP, Agriculture share %GDP, Industry share %GDP, Trade openness and Inflation rate. The long-run empirical result using the Johansen test for co-integration tells that there is a long-run causality running from all the independent variables to the dependent variable. The short-run causality also checked by the model and the result shows the joint causality of each variable with different lag running from each independent variable to the dependent variable.Finally, the coefficients of equilibrating Error Correction Term (ECM) suggest that the speed of adjustment (feedback effects towards the long run equilibrium) takes few years for full adjustment when there is a shock in the system.Then it found convergence of the model to the long-run equilibrium. At last this research work suggests for the policy makers to encourage those independent variables to increase the growth level in order to maintain the growth of tax revenue. On the other hand, variables with a negative relation with tax revenue should be reduced to their minimum level to erode the effect on tax revenue.