The impact of taxation on economic growth in Uganda (1998-2018)

Abstract

The study used Vector Error Correction Model (VECM) and Ordinary Least Square (OLS) to examine the relationship between Gross Domestic Product (GDP) used as a proxy for growth and the independent variables (Indirect taxes, Direct taxes, Public sector credit and Inflation). The study based its theoretical frame work on the endogenous growth model. The empirical findings show a long run relationship among the variables. The Vector Error Correction coefficient of (-0.04) showed that about 4 percent of the errors will be corrected in the long run leading to a convergence. And finally, the ordinary least square results revealed that direct domestic taxes have a positive impact on economic growth but the value for indirect taxes was insignificant as it failed the statistical tests at all conventional levels of significance (1%, 5% and 10%). It was recommended that government should strive to widen the tax base by majorly exploiting direct taxes as well as maintaining a mild inflation to spur economic growth in Uganda.