Regional integration and tax revenue: a case study of the East African community (EAC)

The implementation of EAC treaty required the formation of Custom Union as the first step of EAC regional integration process and charging a common tariff on goods from non-member states (EAC, 2012). This may have an impact on the tax revenues of the partner states as it may affect their custom revenues either positively or negatively thus this study empirically examines the relationship between the East African Community regional integration and tax revenue in the EAC partner states alongside identifying other determinants of tax revenue in EAC. The study uses secondary time series data from 1990 to 2011 obtained over the cross section of five EAC partner countries. The data were mainly obtained from World Bank Development indicators (WDI) and supplemented with data from African Economic Outlook, and the East African Community Facts and Figures - 2012.
The study extends the tax model developed by Heller (1975) and also used by Leuthold (1991); Caballe & Panades (1997); Ghura (1998); Chen (2003) among others where the public decision maker’s utility function is maximized subject to a budget constraint in order to establish the impact of EAC regional integration on partner states’ tax revenue. Analytically, panel data techniques of fixed effects, random effects and the first difference GMM are used for the empirical analysis and using the Hausman’s specification test, FE model is the preferable model.
The findings of the study show that the EAC regional integration has a negative impact on the tax revenues of the EAC partner states. GDP per capita, economic growth (GDP growth rate), public debt, population density and lagged tax revenue are identified as the other determinants of tax revenue in the EAC region.
Basing on these findings, the study recommends that the EAC partner states should identify tax bases that cannot be affected by the EAC regional integration since the study found out that the EAC regional integration negatively affects the EAC partner states tax revenues and yet all the EAC partner states depend on tax revenues as their major source of domestic revenues.