Determinants of tax effort in developing countries: Empirical evidence from Uganda

Abstract

Tax effort is the exertion that a country puts into collecting revenue that is necessary to meets its expenditure demands for sustainable development. One of the reforms that the World Bank recommends to DCs aimed at augmenting their revenue is a tax reform. Towards this endeavour, Uganda has carried out a number of tax reforms; but its tax share to GDP has not only remained low and stagnant at about 12 per cent but has also not matched her expenditure demands. This has led to high fiscal deficits which have persisted over the years. This study was carried out using time series data obtained from the World Bank’s Development Indicators 2010 CD-RM. A multivariate regression model was used in the analysis to identify the determinants of tax effort in Uganda. The findings of the study revealed that lagged tax effort measured by tax-GDP ratio, share of agriculture to GDP, GDP per capita, openness to trade and external debt stock significantly affect tax effort. Increase in the other mentioned variables augurs well with tax effort in Uganda. However, services and manufacturing sectors’ share to GDP were found not to significantly affect tax effort. The study recommends that if Uganda is to improve her tax effort to the levels of other Sub-Saharan African countries, she needs to invest in areas that would significantly increase GDP per capita. Investment incentives should be provided to the agricultural sector with the view to commoditizing the sector and hence bringing it under the tax net. Uganda should also review the policies regarding the currently offered tax breaks and exemptions with a view to retaining only those that have a productive effect on the development of manufacturing and service sectors.