Revenue Productivity Of Tax Reform And Growth In Public Expenditure In Ethiopia

The objective of this paper is to analyze the revenue productivity of the Ethiopian taxrnsystem and individual taxes in relation with tax reforms by estimating the coefficients ofrntax buoyancies and elasticity’s using OLS method for the sample periods of 1980/81-rn2009/ 10. The aim of the tax reforms in the country mainly focus on generating morernrevenues to mitigate the perpetual fiscal imbalance and financing the increasing socioeconomicrnactivities of the government. These objectives are achieved only through taxrnpolicies to make the overall taxes responsive to the changes in GDP.rnResults of the analyses reveals that the overall tax system is found out income inelasticrnboth in the pre-and post-reform periods, the contributing factors for inelasticity arernmainly low tax-to-base elasticity’s of most individual taxes besides the relatively betterrnperformance of base-to-income elasticity’s during the periods. The low tax-to-basernelasticity’s are attributable to the sloppy tax administration, generous tax exemptions, taxrnevasions, the significant time lag between tax assessment and tax collection in anrnenvironment of rapid inflation; while better performance of base-to-income elasticityrnshows the capacity of the economy to generate additional revenues. The inelasticity of therntax system indicates that any increase in tax revenue is mainly due to DTMs rather thanrnthe automatic change in proportion to the growth in RGDP.rnEmpirical evidences of this study suggests that, though it is not effective as expected, taxrnreform had a positive impact more on indirect taxes than direct taxes. These results callrnfor better enforcement of tax laws and further improvement in the tax administration tornincrease tax collection and to struggle evasion and fraud.

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