Tax revenue productivity in Uganda (1992 – 2022)

Abstract

In both tax policy and public finance, there are mainly two important measures used to assess the productivity and efficiency of a tax system in terms of its capacity to mobilize revenue and these are; tax buoyancy which is the total response of tax revenue to changes in national income (GDP) and discretionary changes in tax policy over time; and tax elasticity which is the automatic response of tax revenue to GDP changes less the discretionary tax changes. In this study, we investigated the tax revenue productivity in Uganda from 1992 to 2022 by using a Dummy Variable Technique to control for effects of the Discretionary Tax Measures on Historical Time Series Data for that same period to estimate the elasticity of the Ugandan tax system.

The results show that the overall tax system is inelastic with the only elastic tax being Value Added Tax, with all the other component taxes being inelastic. However, in the long run the overall tax system and individual tax categories were buoyant except Import Duty and Local Excise Duty. We have seen the low productivity of the tax system for mainly direct taxes, reflecting the inelasticity of the direct tax system. In addition, estimates of the buoyancy and elasticity of total tax revenue and individual tax revenue show that tax reforms have been the main reason for the increase in revenue productivity. Decomposition of the elasticity coefficients into tax-to-base and base-to-income elasticities showed that the former was greater than the latter. Analysis of the components of the income elasticities therefore revealed that the modesty of the elasticity of the tax system results, first of all, from the inelasticity of the tax bases, in particular the tax bases of indirect taxes, namely the Tax on value-added, excise duties and customs and import duties. This indicates that there is potential revenue in the economy which is untaxed. Second, the inelasticity of the direct tax system results from the inelasticity of the bases in relation to the GDP of direct tax items especially Personal Income Tax (PAYE). Indeed, the elasticity coefficients of the base relative to the GDP of these tax items have been shown to be low. To improve the return on direct taxes, reforms to improve the efficiency of collection procedures or adjust the rates of certain direct taxes are needed. As for indirect taxes, measures to broaden the base and detect new tax loopholes will be necessary.