Effects of taxes on economic growth in Uganda

Abstract

As most developing countries strive to achieve economic growth and development through taxation, they face numerous economic challenges. The debate on the effectiveness of taxes as a tool for promoting growth and development remains inconclusive, as several studies have indicated mixed impacts of tax on economic growth. Against this background, the study investigated the impact of taxes on economic growth in Uganda from 1985 to 2020. The study carried out various preliminary tests including descriptive statistics, and stationary tests using Augmented Dickey Fuller (ADF) test. The Augmented Dickey Fuller test and Phillips perron tests confirm that variables were stationary at both level and after differencing. This study employs the Autoregressive Distributed Lag (ARDL) model to estimate the long run relationship between the Economic growth and other explanatory variables. Findings indicated that tax revenue is negatively related to Economic Growth in Uganda. It was significant at 10% level. The study concluded that tax revenue has a significant negative relationship with Gross Domestic Product. The government should realize effective macro-economic policies along with momentous improvements in the structure and functioning systems of governance for stabilizing economic growth, such as tax policy changes. Furthermore, to stimulate economic growth in Uganda, the government should urgently plan to broaden the tax base. The Ugandan government should ensure favorable tax rates that are sufficient to generate enough revenue to finance human capital development and infrastructure development.

Keywords Economic growth, Taxation, Auto-regression Distribution Lag Model (ARDL), Co-integration, Uganda.