Tax Revenue Collection in Ethiopia: Does Institutional Quality Matter?

Abstract

Taxation is a significant source of finance for governments, allowing them to invest in human resources, infrastructure, and delivery of services to societies and businesses. The main aim of this study is to estimate the impact of institutional quality (political stability, corruption, government effectiveness, rule of law, voice and accountability, and regulatory quality) on tax revenue collection in Ethiopia The study used a quantitative research approach, Ex post facto research design and time series data set from 1996 to 2020. Following the unit root test, this study uses the Autoregressive Distributed Lag (ARDL) model and bound test to determine the presence of co-integration. The findings revealed that the coefficient of the rule of law, government effectiveness, and political stability has a positive and significant impact on Ethiopian tax revenue collection in both the short and long- run. However, only voice and accountability had a significant positive association in the long -run. Furthermore, in both the short and long- run, corruption and regularity quality have a significant negative impact on tax revenue collection. Consequently, efforts to combat corruption and improve governance must begin as soon as possible to obtain optimal tax income in the future. The findings of this study add empirical evidence to assist the Ethiopian government's plans to develop and amend tax policies in the coming period to ensure the effects of institutional quality on the tax-to-GDP ratio.

Keywords: 1.Corruption; 2.Government Effectiveness; 3.Political Stability; 4Regulatory Quality; 5.Rule of Law; 6.Tax revenue; 7. Voice and Accountability