Analysis of Tax Revenue Productivity for Selected Countries in the East African Community
Manyanza, Rhodah Mueni
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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.