Estimating tax Buoyancy and stability in Ethiopia

Estimating tax Buoyancy and stability in Ethiopia

This paper estimates tax buoyancy and stability in Ethiopia. There is a growing argument among fiscal policy analyst that in developing countries the revenue generation capacities of nations play a crucial role in shaping the future trends of the economy. In this study attempt has made to estimate tax buoyancy and stability in Ethiopia. Consequently, the major questions of taxation; does tax revenue increases as gross domestic product increases? Is analysed using panel data econometric approach (i.e., fixed effect and random effect models) to check the responsiveness of tax revenue for change in economic growth-buoyancy measures and stability measurement. The data is collected for twelve years from three regional states and one city administration. The result showed tax buoyancy is not responsive for total tax revenue, personal income tax and turn over tax. However, automatic change of revenue for economic growth is exhibited for business profit tax, rental business tax and value added tax. Moreover, the tax stability estimates confirm there is no tax component contributed for the stable revenue stream. Based on the findings, among others creating transparent, efficient and effective taxation system as well as strong policy formulation, monitoring and evaluation on other side should take place for the positive role tax revenue plays on economic growth.