Quite a number of researchers have studied the relationship between macroeconomic factors and tax revenue, with a majority concluding the existence of an interdependence (Tanzi, 1989) (Ghura, 1998) (Gober & Burns J, 1997).
Global Studies.
Over the past decade, several empirical studies have found a link between macroeconomic variables and tax revenue.
G.D.P. growth for one has been shown to have a positive impact on tax revenues. Iriqat and Anabtwar (2016) established that growth in G.D.P. led to an increase in tax revenues in Palestine. Their paper investigated the causality relationship between tax revenue and gross domestic product in developing nations and used Palestine as a case study. The study covered 1999-2014 and divided the years into a time series of three stages. The econometric model of choice for Iriqat and Anabtwar was Ordinary Least Squares regression. Their central hypothesis was that there is no interdependence between tax revenues, and G.D.P. and its components, which they proved wrong for the first two-time stages that are 1999-2001 and 2006-2007. Their last time stage however showed no significant link between the two due to escalation of political instability in the country.
In a similar paper, Odunsi, Egwakhe and Akinlahi (2018) examined the effect of macroeconomic variables on tax revenue performance in Nigeria from the year 1987-2016. Their work considered 1987 as the base year and used Ordinary Least Square for estimation. The results showed a significantly positive impact of exchange rates and real G.D.P. on tax revenue performance while inflation rate had an insignificant negative effect on revenue collection. Based on their adjusted R-squared model, macroeconomic variables can be used to explain 95% of variations in tax revenues in Nigeria. The conclusion of the paper rejected the null hypothesis which was that there was no relationship between the selected variables and government revenue.
The weakness of the impact of inflation is further proved by Birungi (2015) who showed that inflation had a negative average quarterly coefficient of -0.19 to tax revenue. The study sought to determine the effect of selected macroeconomic variables on government revenue in Rwanda. Her paper used correlation and regression analysis and covered a period of nine years from 2006-2014 on a quarterly basis. Based on her results, macroeconomic factors only explained 17.6% of the variations in Rwanda’s tax revenue. Results of Birungi’s paper further evidenced the positive impact of interest rates G.D.P. and exchange rate on government revenue.
Basirat, Aboodi and Ahangari (2014) also showed that exchange rate had a significant influence on tax revenues. Using the Auto regression Distribution Model, they showed that exchange rates and imports both had a positive interconnection to tax income in the long run. Their study also deduced that economic growth in the agricultural sector had a positive effect on tax revenue while increase the oil industry’s share of G.D.P. had a negative notation. Basirat, Aboodi and Ahangari’s paper covered the years 1974 to 2011 and focused on G.D.P. in terms of the oil and the agricultural sector’s contribution, imports and exchange rates in Iran.
Harahap, Bonar, Adler, & Turabagus (2018) showed that the impact of macroeconomic indicators on tax revenue and effective tax rates depended on how the different factors changed. Their study focused on policies and macroeconomic factors in Indonesia between 2010-2015. Using descriptive analysis, simultaneous equations and two least square estimates they proved that a 10% rise in inflation combined with a 5% increase in G.D.P. and a 5% depreciation of the exchange rate result in a 9.35% increase in tax revenue. Simulations involving one each individual variable showed G.D.P., exchange rates had a positive impact while inflation had a negative impact. The papers support the general trend that exchange rates and G.D.P. have a greater effect that inflationary changes. The result supported their hypothesis that macroeconomic factors, effective tax rates and government policies influence tax revenue. It is however important to note that Harahap, Bonar, Adler, & Turabagus’s paper used estimated figures based on selected companies from the Indonesian Stock Exchange.
Local Empirical Studies
Using the descriptive approach, (Omolo, 2012) conducted a study to establish the determinants of tax revenue in Kenya from 2007 to 2011. The total tax revenue generated from various tax variables from the stated period was collected using the quantitative method and analyzed by the explanatory data analysis technique. The study revealed that changes in oil prices and exchange rates were the significant determinants of tax revenue. Consequently, among other suggestions, it was recommended that reforms on the changes in oil prices and exchange rates be considered. Moreover, further research should be conducted to establish other determinants of tax revenue.
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