Select College Of Business And Technology

School Of Post Graduate Studies

Department Of Accounting And Finance

Review of the Work of Determinants of Tax Revenue in Ethiopia

For the partial fulfillment of the course Advanced Taxation

Reviewed By:

1. Yohannes Tesfaye ……………….… MACC/4441/2012

Submitted to: Alebachew Goshim (PhD)

June 2020

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Contents
Title page ...................................................................................................................................................................... ii
Introduction: ................................................................................................................................................................1
Brief Summary..............................................................................................................................................................1
Results ..........................................................................................................................................................................2
Contributions ...............................................................................................................................................................3
Foundation ...................................................................................................................................................................3
Synthesis with Concepts ..............................................................................................................................................4
Analysis.........................................................................................................................................................................6
General Critique ...........................................................................................................................................................6
Further Critiques of a Conceptual Article ....................................................................................................................7
Bibliography .................................................................................................................................................................8

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 Title page
Title of the article: Determinants of Tax Revenue in Ethiopia

Authors: Neway Gobachew*, Kenenisa Lemie

Debela, Woldemicael Shibiru
Name of the journal:

Volume: Vol. 6, No. 1, 2018

Issue: doi: 10.11648/j.eco.20170606.11, pp. 58-64

Year: 2018

Key words: Determinants, Ethiopia, Tax Revenue.

Research type: Applied Research

Available at: http://www.sciencepublishinggroup.com/j/eco

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Introduction:

This is an article review carried out on the research conducted on the topic “Determinants of Tax
Revenue in Ethiopia”. It is an applied research carried out to identify the determinants of tax revenue in
Ethiopia. The research used Quantitative approach to indicate what would happen to tax revenue if
the independent variables to the study change. Ordinary Least Squire (OLS) with multiple variables was
used to assess the relation between dependent and independent variables. Data analysis, interpretation
and presentation is done using descriptive statistics, inferential statistics such as; regression, correlation
and ANOVA,

Infract that, this article is not appropriate for this journal because starting from the name of the journal
it’s the journal that would publish a natural or technological research rather than business and economics
elated researches and the article could be categorized as a review of previous works in addition to that in
order to understand these article at list we need to have a conceptual knowledge of the Ethiopian public
finance and tax system.

Brief Summary
The Problem Being Addressed in research was identifying Determinants of Tax Revenue Performance in
Ethiopian to fulfill the gap the lack of government revenue through tax and increase public goods and
services widely to the public through increasing tax to GDP contribution and increasing government
revenue to minimize or avoid budget deficit.

According to the study the solution being proposed is that increase the share of tax revenue to GDP
through increasing and utilizing domestic resource mobilization would fulfill the gap of financial deficit
to the govern

The evidence that support the solution being provided is that , industry sector share to GDP, per capita
income and trade openness as measured by share of export and import to GDP have significant positive
effect on tax revenue whereas; agriculture sector share to GDP and annual rate of inflation have
significant and negative effect on tax revenue as measured by share of tax revenue to GDP and according
to the study , no comprehensive research has been conducted to assess the determinants of tax revenue
and bridge the gap in the existing literature and the existing literatures indicated inconclusive finding as
far as the determinants of tax revenue is concerned

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Results

Given the results of the research under consideration, Determinants of Tax Revenue in Ethiopia can be
influenced by agriculture and foreign direct investment, The study shows that agriculture has high
contributing to GDP and As far as FDI is concerned it good contribution next to the agriculture and the
study support these by stating different countries empirical review including IMF and world bank report .

The paper also confirmed that industrial sector contributes lowest percentage to GDP and economy is
largely dominated by agriculture share followed by service sector and specifically the research underlines
the following findings

 Agriculture has negative and significant effect on tax

revenue at 1% significance level.
 The result indicated that share of industry to GDP has statistical significant positive effect on tax
revenue at significance level of 1%.
 Inflation as measured by annual headline rate of inflation and taken as measure of macroeconomic
instability is found to have significant effect on tax revenue in Ethiopia.
 Openness degree, measured as the share of exports and imports in GDP, also have significant
impact on tax revenues.
 The model shows that tax revenue is positively and
 Significantly influenced by gross domestic product per capita income.

Hence, the conclusion and recommendation reached in the study can be considered as appropriate and
consistent. This study also contributes in the existing literature to provide additional evidence for the
Determinants of Tax Revenue in Ethiopia and give important information for users and practitioners of
the area.

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Contributions

As far as the knowledge of the researchers is concerned, no comprehensive research has been conducted
to assess the determinants of tax revenue and bridge the gap in the existing literature and the existing
literatures indicated inconclusive finding as far as the determinants of tax revenue is concerned.
Therefore, conducting research with could fill the gap of such contradicting findings is timely and worth
taking.

Hence, research is aimed at is assessing the determinants of tax revenue performance in Ethiopian

Foundation

I believe that the research would help to other researchers to view new determinant factors in raising tax
to the government and in addition to that to prioritize the issues for policy makers it is expected to help
serve as an input for the upcoming researchers to further investigate the points under considerations.

The study provide feedback to the Ethiopian government in making policy measures to be under taken
regarding those determinants, and also serves Ethiopian revenue and customs
authority in improving its performance in tax collection and in making future policy recommendations.

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Synthesis with Concepts

Some of the variables included in the study are derived from other variables. It is important to identify
how these variables were measures in order to make these variables useful for the intended purpose.
Accordingly, the study identified the basis of the variables from which the stated variables are derived
and operationalized these variables for the purpose of the study as indicated in the following table:

. No Variable Definition
1 LPERC Per Capita Income
2 OPPS Trade Openness as Measured by Share of Export and Import
to GDP
3 INFLN Annual Inflation Rate
4 FDI Foreign Direct Investment as Percentage of GDP
5 AGRI Agriculture Sector Share to Total GDP

6 INDU Industrial Sector Share to GDP

7 SERV Service Sector Share to GDP

8 PD Public Debt as Percentages of GDP

Table 01; description of variables

But A research conducted by Workineh (2013) has additional variables compared to these study so that
implies that if the study were conducted by including the following variables it would have other finding
and conclusion

No Variable Definition

1 LODA Foreign aid is used to capture the effect of dependence on foreign

assistance on domestic revenue mobilization (i.e. through tax).

2 LEDU2 Education is by far the most important element for successful

. collection of tax revenue. Because, the documentation of the economy
is essential for an effective tax system

Table 2; Description of additional variables by Workineh (2013)

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 Regarding to the finding is concerned a research conducted by TESFAYE .A (2015)has the same finding
with these study which stated that analysis of the variable tested their hypothesis result shows Foreign
direct investment has a positive significant relation with tax revenue, There is a significant positive
relation between manufacturing sector and tax revenue and there a significant positive relationship
between tax revenue and per capita income hypothesis are accepted while the remaining two variables,
Inflation rate have a negative significant impact on tax revenue and Interest rate has positive significant
impact on tax revenue hypothesis are rejected since their p values are above 0.1 at 10% significant level

The appropriateness of the technique used in the study is determined by the relationship between the
dependent and independent variables. The paper under consideration employed multiple linear
regressions to analyze determining Determinants of Tax Revenue in Ethiopia. There is a number of
studies conducted based on an econometric model with the focus of determining the factors that Tax
Revenue in Ethiopia. These factors are classified as internal aspects of the Tax system as they related to
their return on assets and external aspects of the environment as measured by growth in GDP and
Inflation.

The different studies conducted in this area also assume that there is a linear relationship between tax
specific and determinant of tax revenue. The study under consideration utilized a linear function of a
multiple regression equation, on a pooled cross section time series sample, to assess the relation between
dependent and independent variables. Data analysis, interpretation and presentation was done using
descriptive statistics, inferential statistics such as; regression,
correlation and ANOVA. The assumptions of classical linear
regression were tested and no serious problem was found

The above facts indicate that the model is appropriate and works for existing reality in the study under
consideration.

The article is based on econometric model that incorporates macro and micro economic, determinant of
tax revenue. Accordingly, the article developed an equation for determinant of tax revenue, which helps
to identify dominants of tax revenue. The following equation was developed for analysis

TR = α + βPERC + βOPPS + βINFLN + βFDI +βAGRI + βINDU + β

-SERV + βPD + ε!

Where α is Intercept Term and

β,β, β … ,are
β Coefficients

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The research made by Tesfaye .A (2015) Use similar equation to identify determinant of tax revenue and
the research stated that researcher selected model developed by Madhavi (2008), with some modification
and minimization of independent variables for those data can be assessed easily and other researchers
used exhaustively.

Analysis

There is almost no literatures that could provide information regarding the change on any of the variables
that decrease the determinant of tax revenue

General Critique

The paper has primarily tried to investigate the determinant tax revenue in Ethiopia. Internal (Coutry
specific ) and external (macroeconomic) variables are taken into account so as to examine this fact.
Although, the findings are consistent with similar studies previously conducted, the paper was limited to
certain variables and omitted other variables that may affect determinant tax revenue (Annual Inflation
Rate, Public Debt as Percentages of GDP ,Trade Openness ,Foreign Direct Investment ,Agriculture
Sector Share to Total GDP ,Industrial Sector Share to GDP ,Service Sector Share to GDP ,Per Capita
Income. Hence, we believe, given the findings of other studies, these omitted variables are important and
might change the result of the research under study if they were introduced in the model.

Overall, we can say that it is a well attempted paper which contributes in the existing literature to provide
additional evidence for the factors determining the determinant tax revenue in Ethiopia and give
important information for students and practitioners of the area

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Further Critiques of a Conceptual Article

I do agree that arguments made by the authors is would be effective if its operationalize by the concerned
body and the finding of the study has the same result by the research conducted by Belay .Z(2015) Gross
domestic product has highly positive relationship with tax revenue in Ethiopia andthis lead to increment
of tax revenue performance for the country. It has been supported by different scholars as it has such
relationship.The finding also explained that public debt has positive relationship with tax revenue in
Ethiopia, but this has many conflicting result among scholars, many said positive relationship and other
negative relationship.The study also revealed Openness or export plus imports as share of gross
domestic product has positive relationship with tax revenue performance. So, as openness increase tax
revenue collection also increase for country.Foreign direct investment has positive relationship with tax
revenue in Ethiopia as the study explained. With this, tax revenue collection increased as foreign direct
investment increase in Ethiopia.Foreign aid has negative relationship with tax revenue performance in
Ethiopian, as it was stated in literature ;government will not search of other means of financing if he got
foreign aid, example no increasing tax base.The finally finding of this study has been ended with
explanation of inflation effect on tax revenue in Ethiopia. As the above finding revealed, tax revenue and
inflation has positive relationship in Ethiopian. This is because tax revenue collection in Ethiopia is more
from consumption product. So, demand increase from time to time regardless of its price. The other
reason stated in the study was, fiscal policy used tax imposition for inflation controlling purpose. As a
result, tax revenue collection increase as inflation increased in Ethiopia.

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 Bibliography

Agbeyegbe, T., J.G. Stotesky And A. Woldemariam, 2004. Trade Liberalization, Exchange Rate
Changes, And Tax Revenue In Sub Saharan Africa. Imf Working Paper 04/178: 1-32.

Alemayehu, G. And S. Abebe, 2005. Taxesand Tax Reform In Ethiopia, 1990-2003. United Nations
University World Institute For Development Research Paper No. 2005/65.Gupta, A.S., B. Clements,

Belay Zewude Ayyele ,2015, Determinants Of Tax Revenue Performance:Ethiopian Federal

Government, Ddis Ababa Universitycollege Of Busisness And Economics

Department Of Accounting And Finance

Tesfaye Alemayehu Daba ,2015, Determinants Of Tax Revenue In Ethiopia, Addis Ababa
Universitycollege Of Business And Economics Department Of Accounting And Finance

Pivovarsky And E.R. Tiongson, 2003. Foreign Aid And Revenue Response: Does The
CompositionOf Aid Matter? Imf Working Paper No. 03/176

Workineh Ayenew Mossie, Lecturer, Department Of Economics, Determinants Of Tax Revenue In

Ethiopia Wachemo University,

wondwosen, W., 2011. The Impact Of Foreign Capital Inflows On Economic Growth, Savings, And
Investment In Ethiopia. Master’s Thesis, Addis Ababa University. Addis Ababa