Determinants of Tax Revenue: A Cointegration and Causality Analysis for Ethiopia, 1992–2022

Abstract

Tax revenue stands as the lifeblood of any economy, necessary for financing government functions, public services, and developmental projects. To uncover the factors affecting tax revenue and develop strategies for improving or modifying it, conducting quantitative research on taxation is beneficial. Although this area has been extensively studied, existing research often focuses on developed countries and frequently overlooks the impact of variables such as corruption perception and shadow economy on a country’s tax revenue. To this end, the study empirically examines factors influencing tax revenue in Ethiopia, using data from 1992 to 2021. A variety of statistics such as unit root test, ARDL bound test, and ARDL-ECM were employed in the analysis. Post estimation analyses such as stability, normality and autocorrelation tests were also performed. The ARDL-ECM result shows trade openness (LNOPPS), inflation rate (LNFLN), share of manufacturing (LNMAF), corruption perception (LNCP) and (LNGDP) have positive and significant effect on tax revenue both in the long run and short run. The result also indicates a negative and significant relationship between foreign direct investment (LNFDI) and shadow economy (LNSE) with tax revenue. Furthermore, the past value of tax revenue negatively influences the current tax revenue. The findings suggest that to enhance tax revenue, the government should broaden the tax base, curtail overly generous tax holidays, bolster tax enforcement to curb evasion, and promote the development of industrial parks and special economic zones. The findings will have practical implications for policy makers, tax regulators and taxpayers in that it provides useful insight into the potential drivers to domestic revenue.