Revenue Productivity Of The Tax System In Ethiopia

This paper studies the role played by built-in- tax elasticity and discretionary taxrnmeasures in the government's efforts to reduce the budget deficit and financerndevelopment in Ethiopia. The estimation results demonstrate an income inelastic taxrnsystem. Analysis of the components of the overall tax elasticity brings out the generallyrnlow value of the tax -t o-base relative to base to income as a key factor in explaining thernlow elasticity of the tax system. The main reason for the low tax-to-base elasticity isrninefficient and poor tax administration and the existence of large exemptions. Thereforernthe increase in total tax revenue has been mainly due to discretionary tax measures. ThernDTMs were found to be an effective policy instrument both forraising additionalrnrevenue and for of effecting a shift from the taxation of international trade to therntaxation of domestic transactions. These results have important implications for taxrnreform. There is a need to evolve an elastic tax structure since it implies that taxrncollections will grow automatically with the growing economy without resorting tornfrequent, potentially sensitive discretionary changes in tax structure . This mainlyrnrequires establishing a strong tax administration, reducing or eliminating exemptions,rnintroducing lower rates, and broadening the tax base.

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