The Impact Of Tax Reform On The Revenue Productivity Of The Ethiopian Tax System

Ethiopia faces difficulty in raising tax revenue to the level required for the promotion ofrneconomic growth and development. To address these fiscal challenges, the government ofrnEthiopia has initiated a sequence of tax reforms. The evaluation was made in to two differentrncategories. The first category dealt with the whole period (1974/75 – 2013/14) to evaluate thernimpact of tax reform on revenue productivity of Ethiopian’s overall tax system and major taxrncategories on the basis of tax buoyancies and elasticity which particularly emphasized on thern1975, 1992, and 2002 tax reform. The second category was compared with total tax revenuernbuoyancy of the Derg regime period (1974/75-1991/92) and the Ethiopian People’srnRevolutionary Front (EPRDF) period (1992/93-2013/14).The two step Engel- Granger methodrnof measuring revenue impacts of discretionary tax measures by means of single equationrneconometric model is adopted and Ordinary List Square (OLS) estimation techniques is used.rnEvidence suggested that the overall tax system in Ethiopia during the period under study wasrnincome inelastic and this means that the attained growth in national income spurred a less thanrnproportionate automatic increase in national tax revenue and this inelasticity of the overall taxrnsystem is found to be mainly due to low tax- to- base elasticity of individual tax. Relatively lowrntax-to-base elasticity may be explained by inefficient and poor tax administration and thernexistence of high exemption. Moreover, the regression results revealed that the estimate ofrnbuoyancy of the indirect tax in general and foreign trade tax in particular is higher duringrnEPRDF period compared to Derg period. Eventually, the finding suggests that tax reforms hadrnan overall positive impacts on tax responsiveness through more effectively increased elasticity ofrnthe base-to- income component and less effectively through the lower elasticity of the tax-to-rnbase component. Despite this positive impact, tax reforms failed to make the tax systemrnresponsive to income change. Hence the study make recommendation on the direction ofrnimproved response of tax-to-base, establishment of a strong tax administration to increase taxrncollection, reducing exemption, broadening the tax base and bringing new tax payers in to taxrnnet.rnKey words: tax reform, tax productivity, tax base, buoyancy, elasticity, structural measures

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