FACTORS AFFECTING SHARE OF TAX REVENEUE IN GROWTH DOMESTIC PRODUCT (GDP) OF ETHIOPIA

Abstract

This paper identifies the factors affecting share of revenue in growth domestic product (GDP) of Ethiopia from the period 1981 to 2016. Descriptive statics and time series econometrics are used in the model to analyze the data. The study employs Vector Error Correction Model (VECM) model to co-integration in order to investigate the long run relationship and Vector Auto Retrogressive (VAR) for short-run relationship between the share of tax revenue in growth domestic product (GDP) of Ethiopia and macro economic variables share of agriculture sector in GDP, Share of manufacturing to GDP, Share of Service sector to GDP, direct tax to , Indirect tax to GDP, import duty and percapita income.The ADF technique was performed to test for stationary. All the variables were not stationary at levels, but they were stationary at first difference.The long-run empirical result reveals that there is a stable long run relationship between share of revenue to GDP and its factors.Service sector to GD,Share of manufacturing to GDP,Indirect tax to GDP have a positive impact on the share of revenue to GDP during the study period while the other variables have negative effect. Import Duty and Manufacturing to GDP have significant impact to GDP and the other variables have insignificant impact on share of revenue. The descriptive results shows that the increment of tax to GDP ratio is so slight, Agriculture has the largest share of GDP, there is a fluctuation trend of manufacturing to GDP ratio and Even if Share of service to GDP is large next to agricultureit is negatively influence to share of tax revenue GDP. The trend of all tax types are the same. Generally from the study can conclude that there is long run relationship between shares of tax revenue to GDP ratio and the independent variables. Based on the study the government basically, the country’s financial institutions should be committed to make modern tax administration and it needs high integration of the stake holders in the country as whole.