An Evaluation Of the Effects of Tax Revenue Performance on Economic Growth in Zambia (1994 - 2023)

Abstract

This research aimed at analyzing the effect of tax revenue performance on economic growth in Zambia from 1994 to 2023. The study therefore adopted a quantitative research methodology and used econometric model to analyze the various components of overall tax, including direct taxes, indirect taxes and mineral royalties with GDP of the country. Primary data were obtained in the form of time series covering the period of this study and the authors employed the Autoregressive Distributed Lag (ARDL) model to establish the short-run and long-run causality between the sources of tax revenue and growth. The study results provided evidence to support hypotheses formulated with emphasis on the part played by tax revenues in Zambia’s economic development. In the short run the empirical evidence showed that direct taxes and mineral royalties where negatively related to GDP implying that these sources of taxation maybe detrimental to the immediate growth of the economy. On the other hand, there appears a positive correlation between indirect taxes and GDP but with time lag implication that contribution of indirect taxes to GDP took time. In addition, the analysis of the Error Correction Model (ECM) corroborated the presence of a long-run equilibrium relationship between tax revenues and economic growth with a significant lag of the variables towards their long-run equilibrium amounts. Further, the study revealed that although direct and resource base taxes including mineral royalties were problematic for growth in the short run but indirection taxes exerted more gradual and sustainable impact on economic growth in the long term. These findings pointed at the need for the right skewed structure of the Zambian tax system to support short term fiscal requirements and long-term sustainability and growth. The concluded that the government needed to shift to the more diversified pattern of taxation in which indirect taxes would have a key role in funding of the expenditure since such type of taxation was more sustainable for the economic growth. Key Terms: Tax Revenue Performance, Economic Growth, Direct Taxes, Indirect Taxes, Mineral Royalties, Gross Domestic Product (GDP)