The impact of tax policy reforms on domestic revenue mobilization in Uganda (2008/9 - 2016/17)

Abstract

The main objective of this study was to examine the impact of tax reforms on the mobilization of domestic revenue in Uganda. The study applied the concept of elasticity and tax buoyancy to measure the responsiveness of tax revenue to changes in income and the total response of tax revenue to changes in income the study further examined the tax responses to changing economic trends. Based on the findings of this study, the buoyancy estimate shows that tax revenue is elastic implying that the Uganda’s tax system is more dynamic which translates into increased productivity in the tax system. This indicates that a 1% change in GDP results in a more than proportional change of 1.53% in tax revenue. Similarly, tax elasticity results show that the tax system is elastic with an elasticity coefficient of 1.526, this elasticity allows for enough tax revenue to be mobilized to finance public spending. Further, the study assessed the impact of micro economical variable on tax revenue. Findings indicate that the Coefficients on exchange rate are positive and significant for import and overall tax/GDP equation. Import revenue is therefore highly sensitive to changes in exchange rate. This implies that a depreciation of Uganda shilling by one percent against the US dollar can increase import revenue by a 1 percent point of GDP, income tax by 0.13% and overall tax revenue by 0.4% point of GDP. In addition to that, the results indicate that the rising inflation affects collection of import tax than income tax reflected in coefficients of 0.076 and 0.0067, respectively. Implying that, a 1 percent rise in underlying inflation per annum reduced income tax revenue by a 0.006 percentage point of GDP compared with 0.076% for the case of import revenue. In addition to that, results reflect that external grant has a significant impact on income tax, and the overall tax. This suggests that increase in external grants reduces effort to collect revenue. However, the effect tends to be small. a 1% rise in the ratio of external grant/GDP reduces income tax revenue by a 0.045% point of GDP and the overall tax by 0.05% point of GDP. In conclusion the results suggest that the tax reforms had a positive significant impacts on different taxes, and majority of the predominant taxes in the revenue had elastic yield with respect to national income.