Tax reform and tax yield in Malawi

The problem of this study is to evaluate tax reforms as instruments for raising tax yield in Malawi. The study tests two hypotheses: that the yield of the tax system as a whole, of its major components and of individual taxes, is not buoyant; and that the yield of the tax system as a whole, of its major components and of individual taxes is not income elastic. In order to test these hypotheses, two sets of regression equations were estimated. In the first set, tax revenue was regressed on GDP. Tax revenue was again regressed on GDP in the second set, but in individual tax revenue equations, dummy variables were used to capture discretionary tax changes. Moreover, in the total tax revenue equation, tax revenue adjusted for discretionary tax changes was the independent variable. On the basis of the econometric analysis, a few taxes are buoyant. The tax system as a whole is not. In the context of Malawi, relying on increasing tax rates, extending existing taxes to new activities and introducing new taxes are not sufficient for raising buoyancy of the tax system. Only PAYE tax (pay as you earn) is tax elastic. The whole tax system is not. To improve tax elasticity, the tax base must grow relative to GDP.