The relationship between taxes on international trade and domestic taxes in Uganda over time

Abstract

This study investigates the relationship between taxes on international trade and domestic taxes in Uganda from 1991 to 2016. Over this period, Uganda's tax system underwent significant reforms aimed at liberalizing trade and enhancing domestic revenue collection. The research examines the trends in revenue generation from these tax categories and explores the dynamics and causality between them. The study employs time series analysis, including cointegration and Vector Error Correction Model (VECM) approaches, to assess both long-term and short-term relationships. The findings reveal a declining trend in international trade tax revenue due to trade liberalization policies, while domestic tax revenue has increased following tax reforms. The study confirms a cointegrated relationship between the two tax types, indicating that they move together in the long run. The results also suggest bidirectional causality, where changes in trade tax revenue influence domestic tax revenue and vice versa. This research contributes to the understanding of tax policy in developing countries and offers insights for policymakers to balance reliance on international trade taxes with the need to strengthen domestic tax systems. By clarifying these dynamics, the study provides valuable evidence for designing more effective fiscal strategies that support Uganda's economic development objectives.