Empirical Analysis Of The Contribution Of Vat For Economic Development And Social Spending In Ethiopia

This paper discussed some recent critical literature on value-added tax (VAT) in Ethiopiarnrelating to its contributions for economic development and its impact on the SocialrnSpending in Ethiopia. The study employed the tools of quantitative empirical analysisrntechnique to evaluate the contribution of VAT for the development of Ethiopia economy.rnThe generic central objective is to examine the contribution of VAT for the developmentrnof Ethiopia economy and its impact on social spending, equity. The tools of empiricalrnanalysis used are multiple regression models as abstractions of the respective sectorsrnconsidered in the study and also descriptive statistics. The study considered a vector ofrneconomic development indicators as dependent variables and regressed each on VATrnrevenue proceeds and other income (loan, donation, grant, taxes excluding VAT revenue,rnand others) of Ethiopia State for the study period (1995-2002 E.C. or 2003/04 – 2009/10rnG.C.). The state economy is disaggregated into five strategic economic sectors in therndevelopment process, and multiple regression models specified to enhance isolated analysisrnof each sector. Development aspects that are consideredrndevelopment,rneducationrnsectorrndevelopment,rnagriculturalrnincluderninfrastructuralrnand natural resourcerndevelopment, health sector development and other development sectors. Moreover, inrnorder to make clear decision and summarize the study, the summation of all capitalrnexpenditure on the respective sectors were taken and regressed. The analysis showed that,rnexcept education sector, VAT revenue contributed positively for the development of thernrespective sectors. On the aggregate (model VI), the analysis showed that VAT revenuernhad a considerable contribution for t h e development of the economy during the periodrnunder study. However, the contributions are statistically significant only to health andrnagricultural and natural resource development sectors. Therefore, it can be said that, thernVAT tax revenue was unable to neutralize the regressivity of VAT tax levy in Ethiopiarnbecause its unsystematic exemptions, tax structure, and tax system.rnThus, the study concludes that various sectors of the economy of Ethiopia are yet tornbenefit significantly from VAT revenue expenditure of the state government.rnConsequently, the paper calls for equity in sectoral spending of VAT proceeds inrnEthiopia State in order to ensure balanced development and sustainability of the emergingrnmega city status of the state

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