Asymmetric Analysis of the Impact of Taxation on Unemployment in Uganda

Abstract

Uganda, like most developing countries, has one of the highest tax rates not only in Africa but also in the world. This explains the numerous challenges faced in mobilizing sufficient revenues to fight poverty and improve people’s economic welfare. We, therefore, use a more recent nonlinear autoregressive distributed lag model (NARDL) to analyze the impact of higher taxes on the unemployment rate in Uganda. Results indicate that total Unemployment in Uganda is a negative function of both an increase in tax and a negative change in tax. Specifically, if taxes increase, then unemployment decreases by almost 3.9%, and if taxes decrease, then unemployment increases by about 4.9%. Also, the unemployment level decreased by 0.06% with a decrease in the gross capital formation (GFKF). Finally, unemployment also decreases with a rise in GDP and decreases with a decrease in GDP. In a nutshell, Uganda lacks the possibility of making the economy more productive and thus only relies on taxing an already overtaxed economy. Overtaxing an economy kills the possibility of ever building a formidable capital base that can stimulate economic growth and reduce poverty and unemployment. The government, therefore, should cut taxes and level the playing field regarding tax policies for foreign and home-grown investors. Finally, policymakers should also aim to unlock the potential of the informal sector not only to create jobs but also to widen the tax base