Tax Revenue Performance in Africa: Does Macroeconomic Environment Matter?

The paper examines cross-border dynamics of tax revenue and the macroeconomic environment in Africa. This is very vital as African countries aim to harmonize the macroeconomic environment and ultimately need to determine the consequence of such integration on their tax revenue. However, the macroeconomic environment-tax revenue nexus has been less studied in collective Africa. This study extends the current understanding by integrating variance partitioning approaches to comprehensively explain the dynamics. The macroeconomic environment is operationalized using exchange rate (EXR), interest rate (INTR), inflation (INFR), and inward foreign direct investment (FDI). Tax revenue is measured as tax revenue to gross domestic product (tax-to-GDP). The data are collected from the World Bank Database, Global Economy, and World-Wide Governance Indicators from 2000 to 2021 among 41 African countries. The paper employs Generalized Method of Moment, Dynamic Ordinary Least Square, and Impulse Response and Variance Decomposition for the estimations. The estimation reveals that depreciation of local currencies undermines tax revenue. High interest rates backed by marginal capital stock could improve tax revenue. INFR and FDI also have positive effects on tax revenue. The impulse response and variance decomposition reveal that variations in tax revenue are mainly due to its own variations throughout the ten periods even though FDI, EXR, and INFR are still relevant. The implication is that although the macroeconomic environment drives tax revenue, their individual shocks or innovations are weakly tied to African tax revenue. African governments could deepen tax revenue performance by steering up policies to strengthen the integration of macroeconomic gains into improved revenue mobilization.