Agricultural Tax Responsiveness and Economic Growth in Ethiopia

Abstract

Of late, the pattern of tax revenues and its nexus with economic growth in developing countries become an increasing concern for policy framers and researchers. Since tax revenue is one of the important sources of government revenue, a tax policy assumes significance as a vehicle for a viable and long-term source of revenue and economic growth. Similarly, economic growth has augmenting effects on the tax revenue of a country. This study investigates tax responsiveness to the changes in gross domestic product in Ethiopia in the period 1981–2014. It mainly focuses on the components of agricultural tax revenue: agricultural income tax and land use fee. In addition, it also studies personal income tax and business profit income. Understanding and analyzing the level of sensitivity of tax revenue to discretionary policy measures and GDP are essential in formulating fiscal policy. The empirical evidence on Ethiopia suggests that the trends in agricultural income tax and land use fee collection are highly inconsistent. Agricultural income tax and land use fee are not buoyant, indicating that the growth of the agricultural sector has no statistically significant impact on agricultural income tax buoyancy. However, personal income tax revenue, business profit revenue, and total direct tax revenue are responsive to changes in non-agricultural GDP in Ethiopia. In light of these findings, some policy interventions for improving tax revenue are suggested.