Effect of domestic direct taxes on Uganda’s economic growth

Abstract

The purpose of this study was to investigate the causal relationship between direct taxes and economic growth in Uganda, in particular to determine the nature of relationship between corporation tax, presumptive tax, withholding tax, PAYE, rental income tax income and economic growth. The study further looked at the performance of the different individual taxes and the different relationships between these taxes. The behavior of GDP in both the short run and long run was also modeled against direct taxes as per the specific objectives which were i) To determine the short run effect of domestic direct taxes revenue on Uganda’s economic growth and ii) To determine the long run effect of domestic direct taxes revenue on Uganda’s economic growth. The study employed Ordinary Least Square (OLS) method in analyzing time series data captured over the period 2005-2021. Granger causality test was then performed to test for causal relationship between direct taxes and economic growth. The empirical results shows that a unit increase in most domestic direct taxes would decrease economic growth in the long run which is due to the fact that high taxes on personal incomes may act as an incentive to hard work and if not invested in meaningful development projects in the long run, people may not be motivated to work resulting in negative economic growth. In the short run, direct taxes do not have significant effect on economic growth as shown by the results. The study therefore recommends that, the Government, with its move to should be more cautious to attract investments that are pro-growth and pro-development. A pro-growth investment in an economy attract more corporate taxes from corporate profits from such investments and also leads to creation of employment that attracts personal income tax which promotes government expenditure without borrowing.