The Effect of Tax Incentive on private Domestic Investment in Ethiopia

Abstract

In the growth and development literature, capital accumulation and industrialization are considered the crucial and critical key to economic growth. Given this, many developing countries particularly Ethiopia, which follows agriculture, led industrialization policy made number of attempts to increase ratio of investment in the country. Tax incentives schemes are among the attempts made to create investment friendly environment. To answer the research question, the study adopts mixed methods of research by using both descriptive and inferential statistics where primary data from EIA and ERCA officials and secondary data is used from different sources such as EIA, ERCA, IMF and World Bank. Descriptive statistics is used to analyze the trends of private domestic investment, tax revenue and expense rate of Ethiopia. Inferential statistics is also used by employing time series OLS model. A 23 years’ secondary data from 2000-2022 GC was used then time series OLS regression was applied by employing Log PDI as dependent variable along with tax incentives as independent variable and GDP growth rate, inflation, market openness and Log transport availability as control variables. The regression result show that tax incentives and market openness have significant positive long run effect on private domestic investment, inflation on the other hand has significant negative long run effect. Hence to promote the performance of private domestic investment in the country, the study recommended that the government should continue marketing the tax incentive scheme and bring them to be on budget. Further, the study recommended that the government should continue working on improving the trade and infrastructural environment of the country.