TAX REVENUE AND ECONOMIC GROWTH IN ETHIOPIA: A PANEL DATA APPROACH

Abstract

This study examines tax revenue and economic growth in some selected regional state of Ethiopia using annual panel data. Theoretically and empirically, it has been showed that taxes affect the allocation of resources. The main purpose of this study was to reveal the relationship between tax revenue and economic growth for the regional state of Ethiopia during the period 2005-2017. While, analyzing the effect of tax revenue on economic growth, the study applied panel long run and short run relationship between tax revenue and economic growth. The study applied fixed and random effect model, Johansen’s co integration test, VECM, and Granger causality test. The tax revenue with its component though affects economic growth significantly. The causal relationship with economic growth in the long run is not significant as expected. This implies there is independence between tax revenue and economic growth. In the short run the finding shows that there is no jointly causality between tax revenue and economic growth. Furthermore, the speed of adjustment is slow; however, to improve the speed of adjustment needs more controlling and monitoring system should be applied. The findings of the study major issues should the policymakers consider for effective taxation policy formulation and implementation of the economy.