Macroeconomic Impact of Tax Reform in Ethiopia

Abstract

This study analyzes the economy wide impact of tax reform on Ethiopian economy using Dynamic Computable General Equilibrium (DCGE) model. It utilized the updated 2009/10 Ethiopian Social Accounting Matrix (SAM) from 2005/06 developed by Ethiopian Development Research Institute (EDRI). In order to investigate the impact of tax reform on Ethiopian economy different simulations were made turn by turn. First, a reduction in direct tax by 30% is introduced to see its impacts on economy. Consequently, GDP and all other macroeconomic variables such as: absorption, private consumption, government expenditure, import, export, government income, investment, and aggregate output show a considerable improvement. On the second simulation sale tax increased by 66.27% to look the impact of sales tax on economy. As a result, sale tax improve the overall economic performance by improving the government revenue compared to direct tax reduction. Under the third scenario reduction of import tariff by 24% deteriorated the overall economic performance by boosting import and discouraging domestic output. Based on the finding, inspiring direct tax reform and consumption tax reform, protecting the home country from external sector influence to encourage domestic production are the major policy option recommended to bring a good economic performance with lower distortion since it is difficult to abolish distortion when tax reform is conducted.

Keywords: Ethiopia, Tax Reform, Tax Revenue, Macroeconomics performance, Dynamic Computable General Equilibrium.