Agricultural Tax Responsiveness and Economic Growth in Ethiopia
Of late, the pattern of tax revenues and its nexus with economic growth in developing countries become an increasing concern for policy framers and researchers. Since tax revenue is one of the important sources of government revenue, a tax policy assumes
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Agricultural Tax Responsiveness and Economic Growth in Ethiopia Hassen Azime, Gollagari Ramakrishna and Melesse Asfaw
Abstract Of late, the pattern of tax revenues and its nexus with economic growth in developing countries become an increasing concern for policy framers and researchers. Since tax revenue is one of the important sources of government revenue, a tax policy assumes significance as a vehicle for a viable and long-term source of revenue and economic growth. Similarly, economic growth has augmenting effects on the tax revenue of a country. This study investigates tax responsiveness to the changes in gross domestic product in Ethiopia in the period 1981–2014. It mainly focuses on the components of agricultural tax revenue: agricultural income tax and land use fee. In addition, it also studies personal income tax and business profit income. Understanding and analyzing the level of sensitivity of tax revenue to discretionary policy measures and GDP are essential in formulating fiscal policy. The empirical evidence on Ethiopia suggests that the trends in agricultural income tax and land use fee collection are highly inconsistent. Agricultural income tax and land use fee are not buoyant, indicating that the growth of the agricultural sector has no statistically significant impact on agricultural income tax buoyancy. However, personal income tax revenue, business profit revenue, and total direct tax revenue are responsive to changes in non-agricultural GDP in Ethiopia. In light of these findings, some policy interventions for improving tax revenue are suggested. Keywords Tax buoyancy revenue
Tax elasticity Agricultural tax revenue Direct tax
H. Azime (&) Institute of Tax and Customs Administration, Department of Public Finance Ethiopian Civil Service University, Addis Ababa, Ethiopia e-mail: [email protected] G. Ramakrishna M. Asfaw School of Graduate Studies, Ethiopian Civil Service University, Addis Ababa, Ethiopia e-mail: [email protected] M. Asfaw e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2017 A. Heshmati (ed.), Studies on Economic Development and Growth in Selected African Countries, Frontiers in African Business Research, DOI 10.1007/978-981-10-4451-9_13
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Introduction
Several studies have emphasized the importance of tax revenue in promoting economic development. In a recent study, Feger and Asafu-Adjaye (2014) conclude that in order to advance development, governments are required to spend more on public services and this can be achieved by improving tax revenue mobilization. A similar opinion was expressed by Besley and Ghatak (2006) when they wrote, ‘the different public goods such as availability of clean drinking water, sewage disposal, transportations, health care, and primary and secondary schools are the necessity for well-being as well as an input for increasing the productivity.’ Even though the main purpose of taxation is financing public goods and services, the tax policy should be based on certain fiscal principles. In this conne
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