Tax Revenue Effect of Sectoral Growth and Public Expenditure in Tanzania: An application of Autoregressive Distributed Lag Model

This paper analyses the effects of the sectoral growth and public expenditure on Tanzania’s tax revenue performance both in the short run and long run. The paramount importance is to provide policy mechanism that would help Tanzania raise tax revenue from different sectors of the economy as the requirements for financing service delivery increase and the demand for donors declines in the country. The autoregressive distributed lag (ARDL) bounds testing approach. For validity and reliability of the results, the assumptions of homoscedasticity, normality, serial correlations, and model stability were tested. Empirical results indicate that there is a strong positive relationship between tax revenue and main sectors of the economy namely, agriculture, industrial and services sectors in both short run and long run. Similarly, recurrent and development public expenditures, as well as trade openness tend to exert positive effects on tax revenue performance in the short run and long run. However, free trade is likely to lower tax revenue ratio. The uniqueness of this paper is that first, the paper develops a simple analytical model for tax revenue performance based on key sectors of the economy. Second, findings suggest policies to support the development of value added linkages between major sectors of the economy and government expenditures while emphasizing the need to open the potentially large contribution of sectors of the economy with the view to widen the tax base. Third, trade policies should be designed to factor in the ambiguous relationship between trade liberalization and international trade taxes. Further trade liberalization is likely to reduce total tax revenue because international trade taxes, which constitute large share of total tax revenue, decline in Tanzania