Impact of Tax Revenue Mobilization on Economic Growth in Ethiopia

Abstract

This study examines the impact of tax revenue mobilization on economic growth in Ethiopia. Annual time-series data from 1991 to 2024 were used to estimate the Auto Regressive Distributed lag (ARDL) model. The empirical results indicate that tax revenue, indirect taxes on goods and services, and trade taxes have a negative and statistically significant impact on the long-term economic growth in the country. The total tax revenue and tax types have shown statistically insignificant or no relationship in the short run. Furthermore, the agriculture sector and the institutional quality variables have also shown a weaker relationship with long-term growth. Hence, the study concludes that the weak relationship between tax revenue and economic growth in Ethiopia was mainly due to widespread informality, weak tax administration, a narrow tax base, and a low level of information technology to monitor economic transactions. This finding recommends that policymakers should aim to broaden the tax base, reduce exemptions/holidays, and digitalize the tax system to enhance tax revenue collection. Moreover, the government is recommended to restructure the economy, modernize the agriculture sector, and strengthen tax administration to minimize informality and mobilize more tax revenue for sustained economic growth. 

Keywords: tax revenue mobilization, economic growth, Ethiopia, ARDL