The Effect of Sectoral Employment Composition on Tax Revenue in Tanzania.

Abstract

This study examined the effect of sectoral employment composition on tax revenue in Tanzania. This study is motivated by structural transformation, which has altered the employment composition across the main sectors of the economy. Time series data were used from a period of 1970 to 2018. Estimation was performed using the Autoregressive Distributed Lag (ARDL) technique. The results revealed that, in the long run, only a share of employment in the industry sector has a positive effect on tax revenue in Tanzania. In the short run, employment in the industry sector has a negative effect, whereas employment in the service sector and trade openness have a positive effect. Conversely, the employment share in the agriculture sector and GDP per capita exhibit negligible effects. The study adds to the present literature by examining both short-term and long-term impacts, using employment composition in each main economic sector as an independent variable instead of relying solely on aggregate employment. Furthermore, theoretically, a study contributes by explaining how the transformation of sectoral employment composition affects tax revenue. Therefore, policymakers and the Tax Revenue Authority are advised to encourage the transformation of sectoral employment composition to enhance tax revenue collection.