Tax Policy Reforms, Trends and Composition of Tax Revenue in Ethiopia

Abstract

Taxation is a vital fiscal policy instrument indispensable for the development of both developed and developing countries. However, in Ethiopia the resource mobilization effort through tax collection is low though tax policy reforms are done in various periods. Hence, the major objective of this study is to analyze the tax policy reforms, trends and composition of tax revenue in Ethiopia using the data covering 40 years (1974/75-2013/14). Descriptive analysis method was used to address the objective. The finding of the study indicates that most of the tax policy reforms are concentrated on tax legislation and the pace of institutional reform is slow. In addition, the amount of tax revenue collected is characterized by cyclical trends and it is highly dependent on foreign trade taxes. Therefore, the tax system of the country fails to generate adequate revenue commensurate with the growth of the economy. Hence, the institutional reform should be dynamic to improve the tax mobilization effort. Similarly, the government should strength its effort towards direct taxes to raise adequate revenue emanated from the economy as the tax revenue sources from foreign trade is unpredictable provided the volatile nature of the international market situation.

Keywords: Tax revenue; tax policy reforms, composition of tax revenue, Ethiopia