The Effect of the Quality of Governance on Tax Revenue in East Africa

Abstract

The East African (EA) countries have run budget deficits for over a decade, implyingthat the amount of tax is low compared to what is required for the smooth-running oftheir economies. Although several studies have attempted to explore factors behind lowtax revenues, these have overly concentrated on the supply side factors (sectoralcontributions to GDP, GDP per capita, and inflation). Moreover, these studies havehad conflicting results on the determinants of tax revenue. This study, therefore, seeksto investigate the effect of the quality of governance on the amount of tax revenue inthe EA countries (1996 to 2016). The study employs the Panel AutoregressiveDistributed Lag model as developed by Pesaran et al. (1999). Empirical evidence fromthe pooled mean group shows a positive long-run relationship among the variables,implying that an improvement in the quality of governance leads to a long-runincrease in tax revenue. Therefore, long-run efforts to increase tax revenue in EAshould focus on improvements in the quality of governance. However, the study findsa negative short-run relationship.Keywords: tax revenue, quality of governance, panel ARDL, EA