Taxation and economic growth in Uganda

Abstract

This study critically examines the relationship between taxation and economic growth in Uganda from 1990 to 2022, employing a dynamic time series data approach to analyze the impact of different types of taxes on GDP growth. Utilizing the Error Correction Model (ECM) estimation technique, this study dissects the coefficients of key tax variables, including direct taxes, indirect taxes, tax compliance rates, and overall tax revenue, to provide an empirical foundation for understanding how tax policy influences economic performance. The findings reveal a complex interplay between tax structures and growth outcomes, with significant policy implications for Uganda's fiscal strategy. he results indicate that total tax revenue as a percentage of GDP has a positive and significant coefficient suggesting that enhanced tax collection and efficient administration are crucial for promoting economic growth. Indirect taxes, such as Value Added Tax (VAT) and excise duties show a similarly positive and significant impact, reinforcing the role of broad-based consumption taxes in generating stable revenue with minimal distortionary effects on economic activity. Conversely, direct taxes—comprising personal income and corporate taxes—are found to have a negative coefficient underscoring the growth-inhibiting effects of high direct taxation on private sector investment and disposable incomes. The study also highlights the importance of tax compliance, with the tax compliance rate showing a robust positive coefficient indicating that improved compliance enhances revenue generation and economic growth by reducing tax evasion and broadening the tax base. In addition, foreign direct investment (FDI) and public expenditure on infrastructure are shown to have positive and significant effects on growth suggesting that fostering a conducive investment climate and investing in infrastructure development are critical for stimulating economic activity. The negative impact of inflation further underscores the need for stable macroeconomic conditions to support growth. These findings have far-reaching policy implications, advocating for a balanced tax structure that shifts focus from direct to indirect taxes, promotes compliance, and leverages tax policy to attract FDI and support public investment in infrastructure. By aligning Uganda's tax policy with its growth objectives, the study provides a roadmap for enhancing economic performance and achieving sustainable growth.