A study of the Effect of Taxation on Economic Growth Amidst the Debt Crisis in Zambia, 1995 - 2023

Abstract

In developing countries, including Zambia, the government is responsible for providing essential public goods and services such as roads, schools, and hospitals. To fulfill this mandate, governments require revenue. However, this can only be achieved through taxation, as it is the most reliable, predictable, and sustainable source. Taxation not only generates revenue but also redistributes wealth from richer to poorer segments of society and addresses externalities. Despite being resource-rich, many countries face persistent fiscal deficits, often resorting to borrowing to cover higher expenditures. This borrowing affects revenue allocation, as funds that could enhance a country’s productive capacity are instead diverted towards debt servicing. The resulting impact on economic growth thereafter depends significantly on the country’s debt-to-GDP ratio. This study sought to examine the effect of taxation on economic growth amidst Zambia's debt crisis, using annual time series data from 1995 to 2023. The analysis employed the Autoregressive Distributed Lag (ARDL) model, which incorporates cointegration and error correction techniques to assess the effect of public debt, direct tax revenue, indirect tax revenue, and trade tax revenue on economic growth. The empirical findings indicate that, in the long run, public debt was significant with a negative coefficient, direct tax revenue was significant with a positive coefficient, indirect tax revenue was insignificant but had a positive coefficient, while trade tax revenue was significant with a negative coefficient. In the short run, only trade tax revenue exhibited a relationship with economic growth, showing a significant and positive coefficient. Based on these findings, the study recommends accelerating debt restructuring to free up resources for investment in productive sectors of the economy, promoting stable mining policies to create a conducive environment for investors and ensure consistent revenue from the sector, introducing a sales tax to eliminate VAT refund backlogs and enhance revenue efficiency, and lastly, the government should encourage regional trade by leveraging regional trade agreements to expand markets