Optimizing Tax potential in Ethiopia

Abstract

In designing a tax policy, governments often face when and how to mobilize revenues. Crucial to those questions include, are we already collecting more revenue than the economy can produce or not? The current study has precisely addressed this question in the case of Ethiopia. Tax effort prediction is made via an error correction model. The finding shows that tax effort, theoretically measured as the difference between tax revenue collected and tax potential is extremely low in the country. This problem becomes more complicated when GDP shows as a rather inverse predictor of tax potential, indicating massive work of tax base identification to enable tax ratio moves with the speed of GDP growth.