Analysis of Tax Revenue Productivity for Selected Countries in the East African Community
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Date
2020
Authors
Manyanza, Rhodah Mueni
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
The East African Community member states face challenges in mobilizing tax
revenues to the required level which is suitable for economic growth enhancement
and attaining fiscal sustainability. Tax reforms have been implemented in the region
with the main objective of mobilizing more tax revenues. However, the tax revenue
collections have been inadequate leading to persistent budget deficits which shows
the inability of the tax system to generate sufficient revenues to finance public
expenditure. Moreover, the member states have not been able to attain the target of
Sub Saharan Africa average tax to gross domestic product of 26 per cent. Therefore,
this study sought to establish the determinants of tax revenue, analyse the trends of
tax effort indices and examine the effect of integration on productivity of tax
revenue, for selected taxes for countries in the East African Community. The study
employed non-experimental research design using time series data for the period
1984 to 2016. Appropriate tests for time series data were carried out whereby unit
root test was done to determine the stationarity of the data and variance inflation
factor to test for multicollinearity. Various diagnostics tests were conducted to
determine the suitability of each econometric model. Regression analysis was
carried out using ordinary least square. The study findings showed that the political
risk factors, which included bureaucracy quality, democratic accountability and
internal conflict, were key determinants of tax revenue. Gross domestic product per
capita and inflation were determinants of tax revenue in all the countries; trade
openness and manufacturing share in gross domestic product were key determinants
of tax revenue in Kenya and Tanzania; while dependency ratio was a determinant of
tax revenue in Kenya only. The efficiency of institutions was a key determinant of
tax revenues in Kenya. Analysis of tax effort trends the study findings showed that,
tax reforms, economic reforms and stabilization programmes, increase in
agricultural output, political stability and reconstruction programmes increase tax
effort. On the other hand, drought, financial crises, tax reductions and exemptions,
low agricultural output, political instability and foreign aid embargo and high
petroleum prices decrease tax effort. The study results showed that, formation of
East African Community led to direct increase of all selected taxes in Kenya, while
in Uganda it led to increase in total tax revenue, excise tax and direct tax. In terms of
productivity, integration increased productivity of total tax revenue, value added tax
and direct tax in Kenya, while in Uganda it led to increase in productivity of excise
tax and direct tax. Integration also led to decline in productivity of total tax revenue
in Tanzania, excise taxes and import taxes in Uganda and excise taxes in Kenya. The
study recommends that East African Community governments should strengthen
quality and efficiency of institutions through employment of qualified personnel, retraining and review of existing policies. Measures need to be put in place to control
acts of civil war, civil disorder and terrorism. The East African Community
governments should embrace policies that broaden tax base, improve tax
administration, increase economic activities and stabilization policies to increase tax
effort. Moreover, the thriving of East African Community need to be encouraged
through policies such as labour mobility, improved infrastructure and simplification
of regulatory framework coupled with research and development. Measures need to
be put in place to control smuggled goods across borders and reduce tax fraud in
custom authorities.
Description
A Research Thesis Submitted to the School of Economics
in Fulfilment of the Requirements for the Award of The
Degree of Doctor of Philosophy in Economics of
Kenyatta University
Keywords
Tax Revenue Productivity, East African Community