Macroeconomic determinants of tax revenue in economic community of West African states

Abstract

The determination of the effects of macroeconomic environment on tax revenue is very vital for every country and more so for an economic community aiming for harmonization of macroeconomic environment and ultimately integration. However, the extent to which aggregate output, inflation, and unemployment affect tax revenue in ECOWAS has been less studied in the literature. Therefore, this study empirically investigates how tax revenue is related to selected macroeconomic variables. Panel data analysis is employed on six ECOWAS countries' data set on tax revenue, gross domestic product, inflation, unemployment, trade openness and exchange rate over 2005-2019. The Wald's test and Hausman test indicated that the fixed effects regression was appropriate for the study. The results showed that inflation was positively related to tax revenue and statistically significant at 5 percent. A unit increase in inflation led to 0.007 increase in tax revenue measure; economic growth was also positive and statistically significant at 5 percent; a unit rise in GDP resulted in 0.78 rise in governmental tax revenue variable. Finally, Tax revenue variable decreased by 0.10 with a unit increase in unemployment. It is recommended that ECOWAS countries should carefully manage their macroeconomic environment to boost tax revenue.