TAXATION DETERMINANT OF ECONOMIC GROWTH IN DEVELOPING ECONOMIES: A CASE OF TANZANIA

Abstract

Over the last two decades Tanzania has expanded its economic growth but its tax-to-GDP ratio is still below the average for Sub-Saharan Africa. The empirical literature on the taxation-growth relationship has yielded inconclusive results, particularly when time-series properties of macroeconomic data are inadequately addressed. This study investigates the taxation determinants of economic growth in developing economies using Tanzania as a case study. Utilizing the data between 1997 and 2022, Autoregressive Distributed Lag (ARDL) procedure was used to determine the relationship between tax revenue and economic growth, using investment, the labor force and trade openness as additional (control) variables. Each of the variables was first expressed in logarithms and tested for unit roots to determine whether they were integrated of order zero or one. The result revealed that the coefficient of tax revenue was estimated to be positive and statistically significant (β = 0.47, p < 0.01). Furthermore, the estimate of the error-correction term was -0.68, indicating that two-thirds of the disequilibrium in the relationship between tax revenue and economic growth is corrected within a year. The study concludes that taxation has a significant positive long-run effect on economic growth in Tanzania with a fast equilibrium adjustment. Policy makers should focus on broadening the tax base, improving administrative efficiency at the Tanzania Revenue Authority (TRA) and allocating revenue from taxation to productive infrastructure investments for positive economic multiplier effect and growth instead of raising marginal tax rates