Dynamism of Tax Revenue Potential in Sub-Saharan African Countries: A Truncated-Normal Distributional Analysis

Agumas Alamirew Mebratu

doi:10.7176/jesd/11-9-08

Abstract

Although taxation is the most effective alternative to long-term funding of public spending, sub Saharan African countries typically experience a persistent gap between the amount of actual tax revenue and their potential. The main aim of this paper is to analyze tax revenue potential drivers in sub-Saharan African countries using truncated-normal distributional analysis panel data from 2000 to 2018. Finding the estimate result shows that the potential for tax revenue has a positive significant correlation with GDP per capita, trade openness, agricultural sector, service sector, manufacturing sector, monetization, population growth, urbanization, and government stability. By comparison, a significant negative link to inflation, income inequality (Gini coefficient), construction industry, age dependency, population density, foreign direct investment, official exchange rate, official development assistance, and corruption. In conclusion, this research confirms that both supply and demand-side variables influence the capacity for tax revenues. Hence, in general, this study recommended that before implementing a new tax revenue policy, the concerned body of any country should first determine their tax revenue potential and their determinants accordingly. The results of the study are expected to contribute insights for an empirical model of a comprehensive examination of the determinants of tax revenue potential and its determinants in Sub- Saharan African countries. Keywords: Dynamism, tax revenue potential, Sub- Saharan Africa, truncated-normal distribution, panel data DOI: 10.7176/JESD/11-9-08 Publication date: May 31 st 2020

Highlights

Taxation is the principal tool for the collection of revenues for each developing and developed economy (Sheikh et al, 2018)
This study covers all Sub-Saharan African countries which have 19 years secondary panel data (2000-2018) at the time of data collection on variables desire to investigate taken from IMF International Financial Statistics (IFS), World Development Indicators (WDI), and World Bank database, World economic outlook (WEO), Transparency International (TP), African Economic Outlook (AEO) and International Countries Risk Guide (ICRG)
The subsistence-farm agriculture sector employs a large proportion of the population, which is over 60 percent of the total workforce, and is active in agriculture in Sub-Saharan Africa (Botlhole, 2010 and Ali and Isse, 2006)

Summary

Introduction

Taxation is the principal tool for the collection of revenues for each developing and developed economy (Sheikh et al, 2018). Efficient taxation strategies may help improve the revenue of governments, reduce the need for public borrowing, reduce aid dependency, reduce excess dependence on commodity exports and increase countries ' ownership of their development agenda (AEO, 2013). Governments are required to spend more on public services to advance development, and this can be achieved by improving the mobilisation of their tax revenue. The collection of tax revenue in subSaharan Africa has historically been low, as governments rely heavily on foreign aid and debt financing to finance these vital public goods. The average aid to gross domestic product (GDP) ratio for the region over the period 1990–2018 was 53%, while tax revenue mobilisation on average was only 15% of GDP in 1980 to 18.2% in 2018 (IMF, 2018)

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Results