The Impact of Tax Revenue on Economic Growth in Somalia

doi:10.7176/jesd/13-2-07

Abstract

The study used a simple endogenous growth model to analyze the impact of tax revenue on economic growth in Somalia. The study used a classical linear regression model based on the OLS estimation method to establish the nature and strength of relationship between taxation and economic growth. Pre-estimation tests were carried out to determine heteroskasdicity, correlation, multicollinearity and normality of the variables. The results revealed overall significance of the explanatory variables in explaining GDP. In view of these findings, the coefficient of determination showed that 49.3 percent of the variation in GDP is explained by income and corporate taxes, international trade taxes and domestic indirect taxes. The findings further revealed that the coefficient of domestic indirect taxes was negative and influencing the economic growth in Somalia. The implications of this is that policy makers should focus more on income and corporate taxes and international trade taxes so as to generate more revenue by improving the tax collection system, eliminating fraud, evasion and corruption Keywords: Tax revenue, GDP, evasion and corruption DOI: 10.7176/JESD/13-2-07 Publication date: January 31 st 2022

Highlights

The greatest obstacles faced by governments are continuously increasing the welfare of their people through the implementation of appropriate economic policies and programs
Descriptive statistics of GDP, income and corporate taxes (ICT), international trade taxes (ITT) and domestic indirect taxes (DIT) .Distribution of a series can be determined by evaluating various statistical measures as indicated in table 4.1
The dependent variable GDP is regressed on the independent variables income and corporate taxes (ICT), international trade taxes (ITT) and domestic indirect taxes (DIT) .The results of the regression analysis are displayed in table 4.3 Table 4.3: Regression Model

Summary

Introduction

The greatest obstacles faced by governments are continuously increasing the welfare of their people through the implementation of appropriate economic policies and programs. The adoption of a broader-based indirect tax is the only effective way to reduce the burden of personal income tax thereby boosting disposable income, promoting savings and capital accumulation that are considered key to the development of the economy Such a measure to reduce the tax burden, may result in increased consumption rather than savings as the MPC is relatively high in developing countries (Gandhi, 1987). For developing economies, the correlation between taxation and economic growth appears to be stronger In a country such as Somalia, where there is no clear framework to be followed when designing tax structure, this paper's findings will go a long way in identifying policy implications for policymakers when designing to change tax structure. The test carried out included; correlation, Recursive Estimate (OLS), heteroskedasticity test and the normality test residual

Model Specification

Results and Discussion

Conclusion and Policy Recommendation