DETERMINANTS OF TAX REVENUE (FROM 1992-2022) IN ETHIOPIA

Abstract

T.he purpose of this study is examining the Determinant of tax revenue in Ethiopia. And it uses time series regression analysis and quantitative research methods; study employs the autoregressive distributed lag (ARDL) error correction model (ECM) regression to analyze the relation between tax revenue and various economic factories in Ethiopia for the period 1992– 2022. The findings from the unit root tests revealed are stationary. The ARDL-bound tests confirmed the existence of a co-integration relationship among the variables. The Johansen co integration of long-run results showed a significant relationship between inflation, nominal GDP, and foreign direct investment. And the same variables are insignificant: trade openness, manufacturing, agriculture. And also the short-run results indicated a significant negative relationship between trade, nominal GDP, agriculture, and tax revenue. In the short run, foreign direct investment has no statistically significant short-run relationship with tax revenue. The diagnostic result show free serial correlation and hetroskedasticity whilst the model’s linearity assumption is supported by the RESET test result, validating the model’s suitability for analyzing variable relationships. The residuals of the model are normally distributed, affirming the model’s reliability in predicting tax revenue, and both the CUSUM and CUSUM squares stability tests indicate that the model is stable over time, reinforcing the dependability of the model’s prediction. The model demonstrates a highly good fit with an R-squared value. The error correction term is highly significant, confirming the existence of a long-run relationship among variables. The study provides valuable insights for policymakers to develop effective economic policies aimed at enhancing tax revenue generation while ensuring economic stability and growth in Ethiopia.