The Effect of the Quality of Governance on Tax Revenue in East Africa

Abstract

The East African (EA) countries have run budget deficits for over a decade, implying that the amount of tax is low compared to what is required for the smooth-running of their economies. Although several studies have attempted to explore factors behind low tax revenues, these have overly concentrated on the supply side factors (sectoral contributions to GDP, GDP per capita, and inflation). Moreover, these studies have had conflicting results on the determinants of tax revenue. This study, therefore, seeksto investigate the effect of the quality of governance on the amount of tax revenue in the EA countries (1996 to 2016). The study employs the Panel Autoregressive Distributed Lag model as developed by Pesaran et al. (1999). Empirical evidence from the pooled mean group shows a positive long-run relationship among the variables, implying that an improvement in the quality of governance leads to a long-run increase in tax revenue. Therefore, long-run efforts to increase tax revenue in EA should focus on improvements in the quality of governance. However, the study finds a negative short-run relationship.