TAX STRUCTURE AND ECONOMIC GROWTH IN AFRICA

Abstract

This paper on tax structure and economic growth in Africa considers the effects of taxes, defined broadly as direct taxes and indirect taxes, on the rate of economic growth in 52 African countries for the period 1980 to 2020 using the two-step system generalized method of moments. Results from the analyses show that a higher direct taxes-to-total taxes ratio (DTR), that is, higher direct tax relative to total tax, is associated with lower rates of economic growth. The contrary is true for the indirect taxes-to-total taxes ratio (ITR). The paper concludes that higher direct taxes, as a proportion of total taxes, lead to slower economic growth on the continent, while higher indirect taxes, as a proportion of total taxes, lead to faster economic growth. The policy implication of this finding is that any increase in the direct taxes, without a proportional increase in indirect taxes, will lower the economic growth rate, while the converse is true for indirect taxes. The paper, therefore, recommends that to enhance economic growth, increases in tax rates or the enforcement of tax laws should place greater emphasis on the indirect taxes, while caution should be applied in the design and administration of direct taxes.