Dynamism of Tax Revenue Potential in Sub-Saharan African Countries: A Truncated-Normal Distributional Analysis

Abstract

Although taxation is the most effective alternative to long-term funding of public spending, sub Saharan African countries typically experience a persistent gap between the amount of actual tax revenue and their potential. The main aim of this paper is to analyze tax revenue potential drivers in sub-Saharan African countries using truncated-normal distributional analysis panel data from 2000 to 2018. Finding the estimate result shows that the potential for tax revenue has a positive significant correlation with GDP per capita, trade openness, agricultural sector, service sector, manufacturing sector, monetization, population growth, urbanization, and government stability. By comparison, a significant negative link to inflation, income inequality (Gini coefficient), construction industry, age dependency, population density, foreign direct investment, official exchange rate, official development assistance, and corruption. In conclusion, this research confirms that both supply and demand-side variables influence the capacity for tax revenues. Hence, in general, this study recommended that before implementing a new tax revenue policy, the concerned body of any country should first determine their tax revenue potential and their determinants accordingly. The results of the study are expected to contribute insights for an empirical model of a comprehensive examination of the determinants of tax revenue potential and its determinants in Sub- Saharan African countries.

Keywords: Dynamism, tax revenue potential, Sub- Saharan Africa, truncated-normal distribution, panel data

DOI: 10.7176/JESD/11-9-08

Publication date:May 31^st 2020