Determinants of Tax Revenue in Ethiopia: Autoregressive Distributed Lag Approach

Abstract

Tax revenue is the main source of revenue for governments in advanced and emerging economies, which fund government spending. The main goal of this research is to look at the factors affecting tax revenue in Ethiopia from 1996 to 2020 using time series data. The impact of agricultural-to-GDP, service-to-GDP, inflation, corruption, political stability, and tax reformation on the ratio of tax revenue to GDP was investigated in this study. The short-run and long-run associations between the variables were determined using the autoregressive distributed lag (ARDL) co-integration approach. The study's outcomes reveal that inflation has a positive relationship with tax; however, agricultural GDP negatively impacted tax revenue in the short run over the study period. Political stability, service-to-GDP, and inflation, on the other hand, has a positive long-run impact on tax revenue, while corruption has a negative impact. We recommend that policymakers and governments combat corruption, maintain political stability, broaden tax bases to include more service-oriented businesses, and reduce reliance on agricultural sectors.

Keywords: Inflation; Corruption; Political stability; Tax reformation; Tax revenue