Effect of income taxation on domestic revenue growth in Uganda: an ARDL approach

Abstract

This study examines the effect of income taxation on domestic revenue growth in Uganda, using monthly data from July 2012 to June 2023. Employing the Autoregressive Distributed Lag (ARDL) model, the research identifies both long- and short-run relationships between tax types and revenue growth. Results show that Pay As You Earn (PAYE) growth is a major contributor to Uganda's long-run revenue growth, with a substantial impact (coefficient = 1.232, p=0.001), positioning PAYE as a key revenue driver. Withholding Tax (WHT) growth also has a positive, albeit less significant, effect on revenue growth (coefficient = 0.164, p=0.053). Short-run analysis reveals that past revenue performance positively influences current revenue growth, reflecting inertia in revenue generation. PAYE growth exerts an immediate impact on revenue, although it displays diminishing returns in later lagged values. Additionally, Value Added Tax (VAT) growth positively influences revenue (coefficient = 0.430, p=0.044), while WHT growth has a strong positive short-run impact (coefficient = 0.322, p=0.000). Conversely, the taxpayer growth rate (TPGR) negatively affects short-run revenue (coefficient = -2.222, p=0.046). The significant error correction term (-2.967, p=0.000) highlights a robust adjustment back to longrun equilibrium, essential for sustained fiscal planning. To bolster domestic revenue growth, the Ugandan government should enhance PAYE administration and compliance through improved collection strategies and taxpayer education. Revisiting Withholding Tax policies and addressing compliance barriers could also strengthen revenue outcomes. Expanding the tax base, particularly by formalizing informal sectors, and improving VAT compliance through targeted training would further support equitable and sustainable revenue growth.