Tax Revenue Effects of Sectoral Growth and Public Expenditure in Uganda

Abstract This paper contributes to a growing strand of literature on the determinants of tax revenue performance in developing countries, particularly in Sub‐Saharan Africa. More specifically we estimate the tax elasticities of sectoral output growth and public expenditure. The unique features of this paper are twofold: First, we develop a simple analytical model for tax revenue performance taking into account some structural features pervasive in most developing countries with large informal sectors. Second, we test the model predictions on Ugandan time series data using ARDL bounds testing techniques. Results indicate that dominance of the agricultural and informal sectors pose the largest impediments to tax revenue performance. In addition development expenditures, trade openness, and industrial sector growth are positively associated with tax revenue performance. We propose policies to support the development of value added linkages between agricultural and industrial sectors while emphasizing the need to unlock the potentially large contributions of the informal sector with a view of widening the tax base.