Analysis of Tax Buoyancy and Its Determinants in Ethiopia (Cointegration Approach)

Tax revenue in Ethiopia has been low throughout the study period (1974 to 2010). As a percentage of GDP it was below the average sub Saharan African countries. Since buoyancy reflect the ability of a tax structure to generate revenues during economic growth, in this study attempt was made to estimate the buoyancies of direct, domestic indirect, foreign trade and gross tax revenues in Ethiopia using annual data from 1974 to 2010. Double-logarithmic functions relating tax receipts to GDP were estimated for each of stated tax categories. The results reveal that gross, direct and domestic indirect tax revenues were non-buoyant both in short run and in the long run. Even though, foreign trade tax revenue was found non buoyant in the short run, it was buoyant in the long run. Moreover, factors that affect the buoyancy of gross tax revenue were also identified. The finding indicates that the share of service sector value added, import and over all government budget deficits to GDP affects positively, whereas the share of official development assistance to GDP affects it negatively. Even though the share of industry value added to GDP has positive effect on the buoyancy of gross tax revenue, statistically it was found insignificant. As the findings of the present study revealed, tax revenues are non-buoyant in Ethiopia, this points the need for enhancing the efficiency of revenue administration in bringing new customers in to the tax net. Keywords: Taxation, Buoyancy of tax revenue, Cointegratio