Examining the effect of tax effort on private investment in Uganda

Abstract

Private investment plays a major role in increasing economic opportunity, enhancing access to public and private services and reducing poverty. Changes in the tax rates which lead to changes in the tax to GDP ratio can affect growth of private investment in an economy. There is little empirical literature to support this narrative for a low income country like Uganda. This study focuses on investigating the effect of changes in the CIT and VAT tax to GDP ratios on private investment taking into account the macro-economic factors that can influence investment. Macro data of Uganda was extracted from the World Bank database for a period of 31 years (1990-2021). The research employed time series analysis and particularly used the ARDL estimation approach and bounds testing to investigate the possibility of a co-integrating relationship between tax to GDP ratios and private investments. This study found both CIT and VAT ratios to GDP significant in the short run and positively affecting private investment by 0.26% and 2.94% respectively. However, in the long run the results were revealed to be insignificant. The government should put in place a fair taxation system, which encourages an inflow of more private investments. There is need for government to find a balance between raising tax revenue and maintaining economic competitiveness. There is need or government to put in fair and efficient taxation system with the greater part of revenue collected into invested in public goods and services such as infrastructure, education, and healthcare, which can create a more attractive environment for businesses.