DETERMINANT OF TAX REVENUE PERFORMANCE BY ETHIOPIA REVENUE AND CUSTOM AUTHORITY

Abstract

The development of any nation depends on the ability of the government to generate sufficient amount of revenue from its own internal source of finance. Tax is the most efficient and effective tools of fiscal policy in the world through which a government is able to supply a variety of social and welfare services. Many developing countries face fiscal deficit due to low tax collection performance. Similarly, Ethiopian tax collection performance is low as compared to other sub-Saharan African countries and the trend of these taxes not consistent. The main objective of the study was to identify determinants of tax revenue performance by Ethiopia revenue and custom authority using time series data covering period from1980-2015. The variables used in the study were inflation rate, external debt, unemployment rate, GDP per ca pita , urbanization rate as explanatory variables to explain the explained variable of tax revenue performance. Multiple regression model and Vector error correction model have been employed to analyze the long run and short run relationship for the analysis and test the hypotheses developed using ordinary least square. The stability of the data is checked and all the data are stationary by differencing, beside all the CLRM assumptions were tested and none of the assumptions violated in the study. Accordingly, the result of the regression model revealed that urbanization rate, inflation rate and GDP per ca pita have significant positive relationship with tax revenue performance, whereas unemployment rate has significant negative relationship with tax revenue performance in the long run. But external debt has negative insignificant effect in the long run .Unlike the long run; only external debt has a significant positive effect on tax revenue performance in the short run. Finally, the study forwarded conclusion and recommendation that enhance tax revenue performance to incorporating all responsible organs under the tax system, improving labor market to bring unemployment back down ,deepening currently followed market economy and expand formal settlement and exhaustively working to track foreign investment.