Effect of tax revenue growth on economic growth in Rwanda period of 2003 to 2023

Abstract

Economic growth is anticipated to be stimulated by higher tax revenues, which will fund social services, infrastructure, and economic diversification. But even though tax revenue has increased significantly during the past 20 years, Rwanda's economic growth has stagnated. In order to determine how tax income growth affected Rwanda's economic growth between 2003 and 2023, this study was conducted. In particular, from 2003 to 2023, the study looked at Rwanda's tax revenue trends and the connection between tax revenue increase and economic expansion. Null hypotheses were rejected during the assessment. The study used software (E-Views 10) for econometric analysis using time series data from Rwanda Revenue Authority and National Institute of Statistics of Rwanda reports. The study employed the Multiple Linear Regression Model and the Ordinary Least Squares (OLS) method to evaluate the long-term effects of various tax components on GDP by estimating the impact of independent variables on the dependent variable and determining the direction and strength of these relationships. The empirical findings revealed a statistically significant positive relationship between total tax revenue and economic growth in the long run, with customs duties (coefficient 31.56118) and PAYE (23.63706) contributing more strongly to GDP than other tax revenues (coefficient -13.22934), which has a significant decrease in GDP. It is observed that R-squared is 0.908230, showing that 91% of the variations in the growth of GDP in Rwanda are explained by independent variables (profit taxes, excise tax, customs duties, PAYE, and other tax revenues), confirming the robustness of the analysis. Thus, the study comes to the conclusion that sustained economic development can be supported by an effective tax structure, especially one that improves customs duties and PAYE collection. Recommendations for policy include examining various tax tools, adjusting tax laws to better suit the objectives of economic development, and, lastly, enacting moderate tax rates to stimulate the economy.