Impact of Tax Revenue on Economic Growth in Rwanda from 2006-2021

Abstract

Rwanda is working tirelessly to achieve economic growth and development. Taxation is an effective tool for promoting and accelerating economic growth and development, as evidenced by numerous studies on the impact of taxes on economic growth. The objective of this study is to scrutinize the impact of tax revenue on economic growth in Rwanda from 2006-2021. Time series data from Rwanda Revenue Authority (RRA) and the National Institute of Statistics of Rwanda spanning from 2006Q1-2021Q4 were collected. Gross domestic product (GDP) as a proxy for economic growth is the dependent variable, while direct tax (DT), tax on goods and services (TGS), and tax on international trade (TIT), which are all independent variables. Analysis was done with help Econometric software (E-Views 8.0). A significant literature review for this study is available. The unit root and co-integration tests found that all variables are co-integrated of order one, I (1), implying that there is a long-run equilibrium relationship between variables. As a result, the Johnsen test was used, and the results demonstrate that DT, TGS, and TIT have a long-run impact on GDP, but there is no short-run causation between DT, TGS, and TIT on GDP. The OLS regression was then deployed. The regression results showed that the coefficients for DT and TGS were significant, while the coefficient for TIT were not significant; Therefore, TIT was excluded in the model. The adjusted R-squared is 0.994407, showing that 99.4 percent of the variation in GDP was explained by the variation in DT, TGS, indicating that the model is fit. Keeping all other variables equal, the result reveals that one percent (1%) change in direct tax (DT) and tax on goods and services (TGS) leads to increased economic growth (GDP) by 0.19 % and 0.58 % respectively. This study concludes that direct tax (DT) and tax on goods and services (TGS) variables have positive and significant impacts on economic growth, while the tax on international trade (TIT) variable has no significant impact on economic growth. Means TIT is not a good influence of GDP. This is explained by various exemptions that distort the import taxes in Rwanda. This study recommends that policymakers focus on domestic taxes to have an impact on the economic growth of Rwanda more than customs tax. JEC Codes: E6 , HE,011