Reforms and Their Implications on the Revenue Productivity of the Ethiopian Tax System

Course ID
Ethiopian Economics Association (EEA)
Tadele Tafese

Ethiopia, like any other developing county, faces difficulty in raising tax revenue to the level required for the promotion of economic growth. Hence the country has been experienced a consistent surplus of expenditures over revenues for long period of time. To address these fiscal challenges, the government of Ethiopia has initiated a sequence of tax reforms starting in the early 1990s. This study looks at the productivity of the tax system and the contribution of these reforms in raising revenue computing buoyancies and elasticities for the whole period under study as well as for the pre‐reform and post‐reform periods. The Ehdaie’s (1990) method of measuring revenue impact of discretionary tax measures (DTMs) by means of dynamic simultaneous‐equation econometric model is adopted and a two stage least square (2SLS) estimation technique is used in this study. Evidence suggests that the overall tax system in Ethiopia during the period under study (1974/75‐2007/08) was income inelastic and this means that the attained growth in national income spurred a less than proportionate automatic increase in national tax revenue. The income inelasticity of the overall tax system is attributed to the inelasticity of each individual tax and this inelastic nature of each individual tax except domestic indirect taxes is found to be mainly due to low tax ‐ to ‐ base elasticity. An analysis of the difference between the buoyancy and tax ‐ to ‐ income elasticity indexes also shows that discretionary tax measures introduced during the period under study were effective policy instruments.Moreover, the findings suggest that tax reforms had an overall positive impact on tax responsiveness and this result worked more effectively through 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 changes. In fact, import tax was found elastic after the reforms. Hence the major recommendation of this study is that there should be further work in both tax collecting and economic policy making for more improved tax productivity.

Corporate Author:Getnet Alemu, Worku Gebeyehu, Demirew Getachew (Editors) & Ethiopian Economic Association (EEA)
Publisher:Ethiopian Economic Association (EEA)
Primary Descriptors:Revenue

Secondary Descriptor:Productivity

Geographic Descriptors:Ethiopia
Cataloge Date:03/11/2015
Broad Subject heading:Tax System
Call Number:330.963 PRO 2014
Serial Key Title:Proceedings of the Eleventh International Conference on the Ethiopian Economy
Publication catagory:International Conference
Content type:EEA Publication
Publication date:2014-06-02 00:00:00
Place of publication:Addis Ababa, Ethiopia
Type of material:Book
Current frequency:Annually
Author: Tadele Tafese