The Effect of Tax Incentive on Domestic Investment in Ethiopia: ARDL Approach

Abstract

The aim of this paper was to evaluate the effect of tax incentive for domestic private investment over the period 1982 to 2017. The study adopts quantitative method and descriptive design of research respectively. To this end, secondary data have been collected from pertinent government authorities and World Bank. Descriptive statistical analysis has been used to analyze the trends of domestic investment, tax revenue and tax incentive of Ethiopia. For analysis of inferential statistics of time series data Autoregressive distribution lag approach to co-integration and error correction model are applied to investigate the long-run and the short-run relationship between the dependent variable (domestic investment) and the explanatory variables. Due to adoption of tax incentives; there was an incremental trend of domestic investment in the study period, but has no consistent growth trend. In the long run tax incentives have a positive significant impact effect on domestic investment at five percent. A one percent change in tax incentive brought 1.401 percent change in domestic investment in Ethiopia. The finding implies domestic investment has been stimulated through tax incentives complemented with sustainable economic growth, basic infrastructures and social overheads and improved and globally inclusive market. The study basically recommends that the government of Ethiopia should approve implementation of critical and periodically cost- benefit effective tax incentive with good access of market, basic infrastructure and sustainable economy to boost domestic investment.

Keywords: Tax Incentive, Domestic Investment, Ethiopia, ARDL

DOI: 10.7176/RJFA/11-5-06

Publication date:March 31^st 2020