| Abstract: | The main objectives of the study is to examine the long run and short run impact of tax revenue
on economic growth in Ethiopia using gross domestic product (GDP) per capita, as a proxy for
economic growth over the period of 33 years 1990/91 to 2022/23. The trends of tax revenue and
gross domestic product (GDP) per capita growth rate of Ethiopia is fluctuating during specified
time of period. Autoregressive Distributed Difference Lag (ARDL) and Error Correction
Methods (ECM) methods are used for the study. The results of the Bound test suggests that there
is long term correlation with gross domestic product (GDP) per capita, tax revenue, government
expenditure, Gross capital formation and real labor force.
The result of Autoregressive Distributed Difference Lag (ARDL) models indicates that estimated
coefficients, tax revenue, is significant effect on economic growth and their signs are consistent
to the existing theories.
The findings of the research have an important policy implication. The result of trends of tax
revenue and gross domestic product (GDP) per capita growth of Ethiopia during the study
periods are fluctuating so it recommended that Ethiopian government should take appropriate
measures that makes tax revenue and gross domestic product (GDP) per capita growth lower
fluctuating trends. In order to increase economic growth, it is important to strengthen the taxation
system. Firstly, Tax authority should build strong and stable tax institution and encourage
volunteer taxpayers. Secondly, Policy makers should build a secure business atmosphere for
taxpayers to raise tax revenue. Finally, government revenue and government expenditure must
go in parallel ways, so government establishes strategies that encourage distortionary taxation
and productive government expenditure. There are several further research direction Firstly, the
study did not consider some variables, like illegal trade, contraband trade, tax evasion and
informal sectors activities. Secondly, macroeconomic variables such international trade, inflation
rate, and remittance that directly affect economic growth but cannot included in the model so this
can be an opportunity or further research directions |
