Determinants of Tax Revenue Share in Uganda

Joweria M. Teera

Abstract Uganda, like many sub-Saharan African countries faces difficulty in raising tax revenue for public purposes. This paper uses time series data for Uganda during 1970-2000 to analyse the determinants of tax revenue share in Uganda. Among the variables identified as affecting tax revenue is tax evasion, with the empirical results confirming its importance. Further insight is gained into the determinants of tax shares by application of the model to individual taxes, and the results show that tax evasion affects all the taxes.

JEL Codes: H20, E62 Key Words: Tax Shares, Tax Evasion. Address for Correspondence:

University of Bath Department of Economics Bath BA2 7AY e-mail: [email protected]

1.

Introduction

Considerable effort and attention in most developing countries is devoted to policies best suited to the promotion of economic development, where the major focus of these efforts is the search for desirable fiscal policies with considerable stress being placed on the role of taxation as an instrument of economic development. Taxation policy has always been an important instrument for augmenting revenue. This is as true in developing countries as in developed countries, where tax revenue is the major source of domestic revenue. Thus the most important motivation for fiscal policy in most developing countries is the need to raise revenue.

In Uganda, the tax system has been one of the victims of numerous economic crises that have plagued the country since 1966. Tax collections are still very low leading to large fiscal deficits. The country has also suffered from over-dependence on a small number of sources of tax revenue, which are vulnerable to external shocks and remain a crucial problem in the tax system. Since May 1987, Uganda’s tax system has undergone fundamental reform in response to the need for funds to support economic and social development. The government intensified efforts in the area of tax administration and expenditure cutting to attain fiscal discipline. In 1991 the government set up the Uganda Revenue Authority (URA), a semi-autonomous body responsible for carrying out tax policy implementation. It was charged with the task of administering and collecting tax revenue for the central government. Other reforms have included; partial removal of exemptions, harmonization of the customs duty rates, narrowing the tax rate bands, reduction of the tax rates, and introduction of new forms of taxes, which are relatively easy to administer. In 1996, the Value Added Tax

2

(VAT) was introduced. This was meant to widen the tax base by bringing all supplies of goods and services under the tax net.

A combination of good governance, improved tax administration, credible macroeconomic policies and other discretionary tax measures has resulted in an improved tax to GDP ratio, when compared to the 1980s, which however is still very low compared with other countries. The failure of the tax system to generate sufficient revenue has led to the government running unsustainable deficits (see Table 1).

Table 1.

Year 1971/72 1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00

Revenues, Expenditures and Budget Deficits in Uganda (1971/72 – 1999/00) Domestic Revenue Total Revenue % of GDP % of GDP 15.0 .. 10.6 .. 8.0 .. 10.0 .. 9.8 .. 6.9 .. 10.5 .. 3.1 .. 3.2 .. 1.1 .. 6.0 6.8 8.4 8.5 12.2 12.8 9.9 10.4 7.1 8.1 4.2 4.9 6.0 7.5 5.8 7.1 6.7 8.6 7.5 16.7 7.1 15.0 8.0 16.7 9.8 16.6 11.3 15.9 12.1 17.0 11.9 17.6 11.4 16.9 12.3 17.1 11.8 18.3

Budget Deficit % of GDP -8.4 -7.1 -10.4 -5.8 -5.4 -2.6 -0.3 -4 -3.1 -3.8 -3.4 -2.0 -2.6 -3.6 -3.2 -3.7 -4.1 -1.1 -4.5 -4.7 -7.8 -3.1 -4.3 -2.7 -2.0 -0.7 -0.3 -0.9 -2.3

Total Expenditure % of GDP .. .. .. 15.7 15.4 9.5 10.7 7.1 6.2 4.8 9.6 9.9 13.7 9.6 10.7 8.6 11.6 8.2 13.1 21.4 22.8 19.8 21.1 19.0 19.2 18.3 17.2 18.4 20.5

Note: Budget deficits include grants. Source: Publications from Ministry of Finance and Economic Planning (Uganda) and World Development Indicators CD-ROM (2000)

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Consequently, external finance to finance these deficits has been sought as a temporary measure. But it can only be temporary and thus, there is need for a thorough examination of the tax system and tax structure.

Recognizing the need and associated effort by government to raise tax revenue in Uganda, the study tries to investigate the factors affecting tax revenue in the country. With this objective in view, the paper is organised in such a way that the next section discusses tax policy in Uganda. In section three theoretical issues with regards the determinants of tax revenue are expounded, while the model formulation, methodology, and the discussion of econometric results are presented in section four. Section five presents the conclusions.

2.

Tax Systems and Policy in Uganda

Currently, the tax system is comprised of excise duties, import duties, VAT, income taxes, and a number of taxes with small yields e.g fees and licences, drivers’ permits, airport tax, and freight charges. Uganda relies mostly on indirect taxes for its revenue, particularly those inclined to international trade. This dependence on indirect taxes is mainly due to the fact that income taxes are limited by administrative and other constraints. Though indirect taxes are widely perceived to be more regressive than income taxes, this may not be inevitable. For instance food products are exempted from taxes, and food constitutes a substantial proportion of the budget of the poor. Merit good taxes, commonly excise duties on tobacco and alcohol based products, and import duties on petroleum products are a major source of revenue in Uganda, suggesting that heavy merit goods taxes may play an important role in making the country’s indirect tax system regressive. However, demerit may not be the only

4

reason for heavy taxation. Given their low price elasticity, partial equilibrium analysis suggests that it is efficient to tax them.

Since 1987, fiscal authorities have instituted a number of efficiency and revenue enhancing discretionary tax measures. These include; changing all customs duties and excise duties from specific to ad-valorem, reducing the number of customs duty rates, and raising sales tax rates and excise duties on the major revenue-generating domestic products e.g. soft drinks, beer, and cigarettes.

A significant element of tax policy initiated recently has been the attempts to broaden taxation by the introduction of a uniform rate – VAT as a standard model of commodity taxation, and also the restructuring of income tax. Attempts to protect the poor have been through exempting or zero rating foods under VAT, and by raising the threshold of personal income. In addition, the corporate tax rate was lowered from 60% in 1987/88 to 30% since 1997, and the maximum income tax rate has been reduced from 60% in 1987/88 to 30% since 1993/94.

Uganda’s tax system has comprised taxes with a rate schedule that could be adjusted quickly and with a high degree of certainty alter the purchasing power available to private sector. These taxes have been used to increase or cut back private spending to achieve stabilisation goals related to growth, prices, or the balance of payments. Because Uganda’s tax system is cluttered and the base is narrow, adjustment of revenue for stabilisation purposes have come about by piece meal measures - in

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general the raising of rates on indirect taxes such as import duties, excises or sales tax because these taxes are considered to increase revenue with greater certainty and speed.

However, for over a decade, the main tax policy objective in Uganda has been to raise revenue – indeed tax ratio rose from about 4.5% in 1987 to about 11% to date. Unfortunately this has been achieved through ad hoc increases in tax rates to achieve the revenue target with little regard for the potential supply side effects. As with many other countries, particularly, but not exclusively, in the developing world, there are problems of compliance in a culture of tax evasion. It is possible that the rapid increase in taxation of recent years has reduced compliance. This is an issue we will attempt to explore in the empirical work.

3.

Determinants of Tax Performance: Theoretical Issues

A number of empirical studies have exploited the determinants of tax effort in both developed and developing countries, and several factors have been identified. These include; the general level of development (reflected in per capita income and levels of literacy, urbanization, communication, etc.), the administrative and political constraints on the fiscal system, social-political values, indigenous institutional arrangements, popular desires for government spending, plus other factors which condition overall willingness to pay taxes (Weiss 1969). Eshag (1983) asserts that in addition to the taxation potential of the individual countries, the taxation targets set by the authorities, and the ability of governments in practice to collect taxes, the actual amount of tax revenue collected depends on a number of other factors. More specifically the literature suggests the determinants of tax revenue to include:

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i.

The level of economic development:

There is a general conclusion from earlier studies 1 that the tax revenue share rises with the level of economic development. A review of tax systems in developing countries reveals a positive relationship between per capita income 2 and total tax revenue as well as income taxes. This finding lends support to the hypothesis that as countries develop, tax bases develop more than proportionately to the growth in income. Musgrave (1969) argues that the lack of availability of ‘tax handle s’ might limit revenue collection at low levels of income and these limitations should become less severe as the economy develops. Economic development is assumed to bring about both an increased demand for public expenditure (Tanzi, 1987) and a larger supply of taxing capacity to meet such demands (Musgrave, 1969). A higher per capita income reflecting a higher level of development is held to indicate a higher capacity to pay taxes as well as a greater capacity to levy and collect them (Chelliah, 1971). There is also the consideration that, as income grows countries generally become more urbanised. Urbanisation per se brings about a greater demand for public services while at the same time facilitating tax collection (Tanzi, 1987). ii.

Fiscal Deficits and Debt.

The growth of public spending has generated large fiscal deficits in many countries, leading to increases in the share of public debt relative to GDP 3 . With a large debt, the government needs to raise the revenues necessary to service it. When the interest on the debt exceeds net borrowing plus the possible reduction in non-interest expenditure, the level of taxation must go up unless the rate of growth of the economy is high enough to neutralize the increase. Therefore public debt plays a role in determining the extent to 1

Studies include; Hinrichs (1966), Tanzi (1992), etc. Per capita income is used as a measure of development. 3 See Tanzi & Blejer (1988) for an explanation of the relationship between fiscal deficits and public debt. 2

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which countries may take advantage of their taxable capacity (Tanzi, 1987). However, a high debt burden can also create macroeconomic imbalances that may tend to reduce the tax level4 . In general, however, on balance, a high debt burden would tend to raise the tax level, ceteris paribus5 (Tanzi, 1992). On the other hand, however, countries faced with an increased trade deficit may try to restrict imports as an alternative to exchange rate adjustment irrespective of the source of the trade imbalance. This will reduce revenue from import duties. iii.

Openness:

The relative size of the overseas sector, which is a measure of openness, reflects the degree of exposure of an economy to external economic influences. In the presence of inward capital flows, the overall level of activity in the economy is artificially and or temporarily increased through foreign borrowing and so is the aggregate tax base. As a consequence, tax revenues become artificially buoyant (Seade 1990)and volatile. Certain features of overseas trade make it more amenable to taxation than domestic activities, and in developing countries, the overseas trade sector is typically the most monetized sector of the economy. The administrative ease with which trade taxes can be collected makes them an attractive source of government revenue when administrative capabilities are scarce (Linn and Weitzel, 1990). iv.

Share of Aid in GNP

Aid and grants have been a major source of development finance for the majority of developing countries over the past few decades. Empirical literature has tended to evaluate the impact of aid by including it as a variable in a regression for the determinants of some economic performance indicator, emanating from the general

4

Servicing of the foreign debt requires a trade account surplus, which in turn may require a reduction in imports. This affects revenue given the high dependence of the tax system on the external sector (Tanzi, 1989). 5 I.e it may be indicative of a reluctance to tax.

8

concern that it might have a negative impact on some of such indicators. For instance, there is a general concern that aid may decrease taxation revenue in recipient countries. In fact, the results in Franco-Rodriguez, Morrissey, and McGillivray (1998) ‘s study on Pakistan were in agreement with this concern. 6 v.

Population Density

It is difficult to point out the direction of the effect, without a systematic study. However, population density is expected to have an adverse effect on the tax ratio, mainly because the higher the density of population the higher will be the use of taxable sources (i.e. rising the tax base), and the tax authorities could intensify their efforts to collect taxes at a relatively minimal cost as compared to a sparsely populated country. Conversely, in a thinly populated area, administrative costs are expected to be higher in terms of total yields and therefore, less encouraging for collection of tax revenues. In such a situation, the degree of tax evasion and tax avoidance may also be relatively higher than in the densely populated area (Ansari, 1982). vi.

Share of Agriculture in GDP

Agriculture is considered to be a salient feature regarding the structure of the economy and as Tanzi (1992) asserts, a country’s economic structure is one of the factors that could be expected to influence the level of taxation. For developing countries, the share of agriculture may be an important influence on the tax share, from both the demand and supply point of view (Tanzi, 1992). On the supply side, it is very difficult to tax the agricultural sector “explicitly”, though it is often very heavily taxed in many implicit ways such as; import quotas, tariffs, controlled prices for output, or overvalued exchange rates (Bird, 1974; Ahmad and Stern, 1991; Tanzi, 6

The results showed that with 1 rupee change in aid money disbursed resulted into a –2.91 rupee change in taxation.

9

1992). On the other hand, small farmers are notoriously difficult to tax and a large share of agriculture is normally subsistence, which does not generate large taxable surpluses, as many countries are unwilling to tax the main foods that are used for subsistence (Stotsky & WoldeMariam, 1997). On the demand side, since many public sector activities are largely city-oriented, it may be assumed that the more agricultural is a country, the less it will have to spend for governmental activities and services. Hence as the share of agriculture in GDP rises, the need for total public spending and so for tax revenue may fall. vii.

Share of Manufacturing in GDP

Manufacturing enterprises are easier to tax than agricultural enterprises since business owners typically keep better books of accounts and records. Manufacturing can generate larger surpluses if production is efficient. Therefore the variable is positively related to the tax ratio. viii.

Tax Evasion

Tax evasion is considered to be of serious concern to those dealing with taxation issues of a country because of the detrimental effects it is assumed to have on tax revenue and the tax system as a whole. One obvious consequence of tax evasion is the loss of tax revenue for government. The fact that some income goes untaxed and also certain indirect taxes such as VAT and excise duties are evaded, leads to the conclusion that tax revenues are lower than if everyone had paid their taxes.

Over the years a growing amount of attention has been focused on the conjecture that a significant and growing hidden economy exists. Most of the authors who have attempted to deal with it have reached one common conclusion that the problem of the hidden economy cannot be dismissed as quantitatively trivial, especially because

10

some of the analytical work done on the subject has uncovered some intriguing issues. The major incentive for the effort to calculate the extent of the hidden economy has been dominated by the worries of fiscal authorities concerned with the loss of tax revenue through tax evasion. Attempts to estimate the amount of the tax revenue loss have produced appalling figures of tax revenue loss. For instance, Feige (1981) estimated the tax revenue loss in the United Kingdom to be around £9 billion. Other estimates of tax revenue losses in the United Kingdom, according to Pyle (1989) ranged between £2 - £11 billion per year. Estimates have also shown that revenue has been lost due to evasion of indirect taxes. Pyle reported the amount to lie between £250m and £ 500m per year due to evasion of VAT. Estimates have also been done in other countries and still figures are not small. 4.

Estimation Model

Specification of a tax effort model requires judgement in deciding which formulation presents the best combination of economic reasoning and statistical merit, as Chelliah (1971) asserts, the assessment of actual and potential tax performance of any country is a matter of judgement that should be based on a consideration of the stage of development and structure of the economy and should also take account of national traditions and relevant special circumstances. Therefore, to analyse statistically the determinants of tax revenue in Uganda, we estimate a model in which tax revenue is functionally related to economic development and structure of the economy. Ty = f (Y , M , A, P, Ag , Mf , D,φ, T ) where; Ty Y M A P Ag

(1)

= Tax to GDP ratio = GDP per capita, in international dollars = the ratio of imports to GDP = the ratio of aid to GNP = population density (People per Sq.Km) = the ratio of agriculture to GDP

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Mf D φ T

= the ratio of manufacturing to GDP = the ratio of external debt to GDP = shadow variable proxying the size of the hidden economy = time trend

The role of the time trend is to capture any exogenous underlying trend in taxation. The shadow variable reflects tax evasion. It is derived by assuming a predictable cash to GDP ratio. A higher than expected ratio is indicative of an above average hidden economy, since relative changes in currency holdings are interpreted as reflecting volume movements in the hidden economy activity (Maliyankono & Bagachwa 1990). Therefore an increase in the amount of cash held by the public can be interpreted as an indication of a rise in the hidden economy transactions, which use currency to escape detection. Assuming that nominal currency holdings increase with increase in GDP, we can derive the shadow variable as below:

LM 1 = β0 + β1 LGDP + β2 TREND + Z t

(2)

Where LM1 7 , and LGDP are the logs of money supply8 and GDP respectively. Z is the error term, indicating the unexplained part of the regression with respect to money supply holdings. It implies that people are holding more money than they would be expected to do given the characteristics of the econo my. This is taken to be an indicator of the hidden economy, which we have termed the SHADOW, i.e. ö = Z. If it is positive, it implies a large hidden economy and vice versa. Its impact on tax as a proportion of GDP is ambiguous. A large hidden economy will reduce both GDP and tax revenue. Normally we would expect the former to decline more than the latter

7

Money supply (M1) is the sum of currency outside banks and demand deposits other than those of central government. 8 M1 was available in local currency, so was changed to US$ by dividing by the official exchange rate.

12

because parts of GDP are effectively free of or pay little tax (low earners). However if the government is able to compensate for the tax shortfall by higher tax rates and more extensive taxes then GDP will fall by more than tax revenue and the shadow economy will have a positive impact on tax ratios. For individual taxes the effect will depend on whether that tax is sensitive or not to evasion.

The model uses a double- log function hence the coefficients will be elasticities. In order to determine more accurately the channels of effect among variables, we estimate the same model on each individual tax.

4.1

Methodology

For empirical purposes it is important to consider the underlying properties of the processes that generate the time-series variables, more specifically, whether the variables in the equation are stationary or non-stationary. We tested for stationarity by use of the augmented Dickey-Fuller (ADF) unit root test, and the results indicated that all the variables are I(1). However, even if the time series data are non-stationary, it is quite possible that the linear combination of the variables is stationary, so that the variables are co-integrated (Gujarati, 1995 & 1999), and so traditional OLS regression becomes feasible in this case, and we do not lose any valuable long-term information, which would result if we were to use first differences of the variables. By carrying out unit root (Dickey-Fuller) tests on the residuals of the original regression, we find that the relationship between the variables exists and therefore the regression results are valid. We estimate an error correction model (ECM) to correct for the possible disequilibrium in the model (Gujarati, 1998 & Mukherjee et al, 1998). The ECM model is in the form:

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∆yt = β1 + β2 ∆xt + λut −1

(3)

where ut-1 is the error component, i.e. ut −1 = yt −1 − β3 xt −1 where â3 represents the cointegrating vector underlying the long-run equilibrium relationship.

4.2.

Presentation of Econometric Results

The model was estimated for the period 1970/71 to 1999/2000. Three equations were estimated, where equation 1 is the original one as set out in the previous section, equations 2 and 3 incorporate lagged debt instead of debt ratio (see Tables 2 to 5).

Since revenues need to be raised in order to service the debt, then the debt in the previous period is more likely to affect the revenue in the current period. This is evidenced by the results as they show that the lagged debt variable is generally significant and positive except for excise & sales taxes. In equation 3 per capita GDP is excluded because of the high correlation with agriculture, and in general equations that exclude per capita income do perform better than those that exclude agriculture. On the other hand per capita GDP has turned out with the wrong sign in all equations, which is surprising.

Tax evasion significantly undermines the tax ratio of the country as seen from its significant and negative coefficient. Openness as measured by the import ratio appears significant but negative as regards total tax ratios, suggesting that openness measures such as a reduction in tariffs rates have been detrimental to taxes. It is not surprising when aid variable is positive since aid in Uganda has always supported imports especially raw materials. The trend variable shows that taxes have been increasing over the period given the value of other variables.

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Table 2. Dependent variable: Total Tax ratio

Table 3. Dependent variable: Excise & Sales Tax

Variable constant

Variable constant

LY LAg LM LP A LMf D shadow trend 2

R

Eq. 1

Eq.2

Eq.3

40.4

53.02

66.2

Eq. 1

Eq.2

Eq.3

79.81

80.67

(2.47)

(3.69)

(4.13)

79.47

(3.81)

(3.06)

(3.32)

-0.96*

-0.83*

--

(3.97)

(3.75)

--

-0.53*

0.06

--

(2.36)

(0.19)

--

-1.72*

-2.22*

-3.59*

(1.94)

(3.73)

(5.34)

-1.49

2.74*

-2.63*

(1.30)

(1.88)

-1.19*

-1.26*

-1.55*

(1.99)

0.23

-0.35

(4.83)

(5.26)

-0.33

(6.08)

(0.83)

(0.88)

-6.63*

(0.83)

-9.54*

-12.32*

-18.79*

-18.07*

-17.8*

(1.85)

(2.97)

(3.38)

(3.89)

(3.04)

(3.34)

0.03*

-0.007

-0.07*

0.15*

0.07

0.08

(2.12)

(0.24)

(2.78)

(2.26)

(0.78)

(0.89)

0.79*

0.68*

0.46*

0.38*

0.23

0.25

(5.83)

(5.04)

(2.99)

(2.54)

(0.99)

(1.28)

0.001

0.005

0.01*

-0.006*

0.001

0.001

(0.68)

(1.56)

(4.41)

(3.51)

(0.35)

(0.32)

-0.19

-0.35*

-0.74*

-1.24*

1.36*

-1.33*

(1.33)

(2.51)

(4.86)

(5.35)

(3.89)

(5.04)

0.22*

0.31*

0.37*

0.55*

0.51*

0.51*

(2.56)

(3.61)

(3.52)

(4.31)

(3.15)

(3.34)

0.97

0.97

0.96

0.97

0.95

0.95

LY LAg LM LP A LMf D shadow trend 2

R

Table 4. Dependent variable: Income Tax ratio

Table 5. Dependent variable: Import Tax ratio

Variable constant

Variable constant

LY LAg LM LP A LMf D shadow trend 2

R

Eq. 1

Eq.2

Eq.3

45.79

59.45

63.15

Eq. 1

Eq.2

Eq.3

55.34

71.74

(1.55)

(1.85)

(2.05)

104.29

(1.92)

(2.98)

(3.77)

-1.30*

-0.19

--

(6.19)

(0.67)

--

-2.09*

-1.76*

--

(12.91)

(7.91)

-0.39

-3.57*

-3.91*

--

-0.06

-1.92

(0.28)

(2.29)

(2.88)

-4.89*

(0.04)

(1.35)

0.88*

-0.06

-0.12

(2.86)

0.94*

0.77*

(2.49)

(0.12)

0.23

(0.24)

(2.45)

(3.23)

-10.9

(0.68)

-12.03

-12.83*

-13.09*

-15.91*

-23.0*

(1.61)

(1.65)

(1.82)

(2.03)

(2.96)

(2.98)

0.21*

-0.05

-0.06

0.22*

0.01

-0.11

(2.50)

(0.38)

(0.48)

(2.61)

(0.14)

(0.44)

0.55*

0.15

0.09

0.91*

0.67*

0.20

(3.19)

(0.64)

(0.47)

(4.51)

(3.33)

(1.13)

-0.007*

0.01

0.01*

0.002

0.01*

0.02*

(2.65)

(1.64)

(2.36)

(0.68)

(3.24)

(4.08)

-0.21

-0.68*

-0.78*

-0.86*

-1.25*

-2.07*

(0.73)

(2.02)

(2.79)

(2.72)

(4.30)

(8.58)

0.34*

0.38*

0.39*

0.45*

0.57*

0.71*

(1.88)

(1.92)

(2.08)

(2.58)

(3.87)

(4.09)

0.98

0.99

0.96

0.95

0.95

LY LAg LM LP A LMf D shadow trend 2

0.95

R

Notes: The debt variable in equations 2 & 3 in all tables is lagged. L = Log. * = significant variable

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Table 6 shows the results relating to the ECM. The results indicate that the model converges quickly to equilibrium with over 100% of the discrepancy between the actual and the long-run value of the dependant variables eliminated or corrected for in each period. This tentatively suggests that Uganda seeks to overcompensate for any shortfall in tax revenue in the previous period. The results show that short-run changes in imports, agriculture, and manufacturing have significant effects on total tax revenue. The insignificant lagged residual for excise and sales taxes indicates that the discrepancy in these taxes is not eliminated. Short-run changes in only the manufacturing ratio affect excise and sales taxes. For income taxes short-run changes in agriculture ratio, aid ratio, and manufacturing ratio affect the taxes. Short-run changes in debt ratio and manufacturing affect the import tax.

Table 6. Variable constant

dLAg dLM dLP dA dLMf dD res{1) 2

R

Results of the Error Correction Model Total Tax Ratio Excise & Sales

Income Tax

Import Tax

-0.022 (0.159)

-0.230 (0.730)

0.082 (0.481)

-0.236 (0.746)

-3.479*** (3.351) -1.522***

-1.823 (0.911) -0.582

-2.022* (1.836) 0.422

-2.926 (1.408) -0.122

(4.296) 0.459 (0.097)

(0.703) 7.995 (0.661)

(0.939) -4.296 (0.657)

(0.146) 5.618 (0.465)

-0.005 (0.180) 0.740***

0.016 (0.243) 0.856***

0.073** (2.027) 0.641***

0.056 (0.839) 1.191***

(4.654) -0.003 (1.042)

(2.483) -0.004

(3.442) -0.0003

(3.435) 0.016*

(0.446)

(0.065)

(1.707)

-1.239*** (3.130)

-1.176

-1.306***

-1.344***

(1.418)

(4.338)

(3.064)

0.77

0.90

0.85

0.94 Source: Author’s estimations.

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6.

Conclusions

A major issue in public economics is the appropriate design of a tax system. Such a system is usually viewed as balancing the various desirable attributes of taxation in that taxes must be raised (revenue- yield) in a way that treats individuals fairly (equity), that minimizes interference in economic decisions (efficiency), and that does not impose undue costs on taxpayers or tax administrators (simplicity).

In order to deal with such issues, the paper addressed some analytical issues regarding the determinants of tax revenue in Uganda. Some interesting results were obtained. A priori analysis indicates that tax evasion may be expected to influence tax revenue. It also has efficiency and equity effects, implying that optimal taxation cannot be achieved in the presence of tax evasion. The results of the study demonstrate that tax evasion is a menace to tax revenue, as it is negatively significant in the model. All the variables identified in the study seem to affect total tax revenues. The effect of the variables on individual taxes varies, but in general agriculture ratio, population density, and tax evasion, affect all taxes. The trend variable indicates that all taxes have increased over the period. Finally, the rapid speed of adjustment in the ECM is also not worthy.

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