Rwanda is working tirelessly to achieve economic growth and development. Taxation effective is the one tool to promote and to accelerate economic growth and development, several studies analyses the impact of tax on economic growth and economic development. The objective of this study is to investigate the impact of tax revenue on economic growth in Rwanda from 2007-2017. Secondary data were sourced from Rwanda Revenue Authority (RRA) and National Institute of statistics of Rwanda (NISR) for the period spanning from 2007Q1-2017Q4. Descriptive data analysis was used and the variable considered here are: Gross domestic product (GDP) as proxy for economic growth, direct tax (DT), Tax on goods and services (TGS) and Tax on international trade and transaction (TITT). Significant literature review for this study is available. The results of the unit root and the co-integration tests revealed that all variables are integrated of order one, I(1) and Johensen cointegration test indicate existence of a long-run equilibrium relationship among variables included in the model and we use also Vector Error Correction Model (VECM) estimation method for data analysis to estimate for short run result. The empirical findings showed that direct tax(DT)and tax on goods and services(TGS) variables have positive at 0.1631 to 0.60 31 respectively impact on economic growth, while Tax on international trade and transactions(TITT) variable has negative at -0.005913 and it impacts on economic growth. This study recommends that the policymakers within government of Rwanda must improve both direct tax and tax on goods and services (domestic tax) and increase Taxes on international trade transactions (customs duties), it will harm economic growth of Rwanda therefore custom duties must be rationally reduced or abolished and free trade zones like Africa continental free trade area (AfCFTA) must create to foster increased exchange of goods and services across borders. Key Words: Tax Revenue, economic growth, Gross domestic product, direct tax, tax on goods and services, tax on international trade and transaction, VECM, Rwanda

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IMPACT OF TAX REVENUE ON ECONOMIC
GROWTH IN RWANDA FROM 2007-2017.
BY
NZABIRINDA Etienne (MSc, ~CPA, Bed)
E-mail: etienne.nzabirinda@gmail.com
Linkedin: https://www.linkedin.com/in/nzabirinda-etienne-963176125/
Kigali November2019

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ABSTRACT
Rwanda is working tirelessly to achieve economic growth and development. Taxation effective
is the one tool to promote and to accelerate economic growth and development, several studies
analyses the impact of tax on economic growth and economic development.
The objective of this study is to investigate the impact of tax revenue on economic growth in
Rwanda from 2007-2017. Secondary data were sourced from Rwanda Revenue Authority
(RRA) and National Institute of statistics of Rwanda (NISR) for the period spanning from
2007Q1-2017Q4. Descriptive data analysis was used and the variable considered here are:
Gross domestic product (GDP) as proxy for economic growth, direct tax (DT), Tax on goods
and services (TGS) and Tax on international trade and transaction (TITT). Significant
literature review for this study is available.
The results of the unit root and the co-integration tests revealed that all variables are
integrated of order one, I(1) and Johensen cointegration test indicate existence of a long-run
equilibrium relationship among variables included in the model and we use also Vector Error
Correction Model (VECM) estimation method for data analysis to estimate for short run result.
The empirical findings showed that direct tax(DT)and tax on goods and services(TGS)
variables have positive at 0.1631 to 0.60 31 respectively impact on economic growth, while
Tax on international trade and transactions(TITT) variable has negative at -0.005913 and it
impacts on economic growth.
This study recommends that the policymakers within government of Rwanda must improve
both direct tax and tax on goods and services (domestic tax) and increase Taxes on
international trade transactions (customs duties), it will harm economic growth of Rwanda
therefore custom duties must be rationally reduced or abolished and free trade zones like
Africa continental free trade area (AfCFTA) must create to foster increased exchange of
goods and services across borders.
Key Words: Tax Revenue, economic growth, Gross domestic product, direct tax, tax on goods
and services, tax on international trade and transaction, VECM, Rwanda.

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CHAPTER-1 INTRODUCTION
1.1. BACKGROUND OF STUDY
Rwanda embraced economic growth, the power of any country in economic growth and
development is mainly depends on level of amount of tax revenue generated to make economy
more advanced.
Bruce et al (2006) point out that generating sufficient revenue to finance government service
delivery is the most important function of a tax system. The government has to provide many
goods and services to its citizens such as health, education, and defense of the country,
maintenance of law and order and management of the economy.
Mustafa (2000) observes that as the economy grows, more people and companies derive higher
income and would therefore be liable to pay higher taxes. Tax elasticity is an indicator of
measuring the efficiency and responsiveness of tax revenue mobilization in response to growth
in the tax base, GDP or national income. A tax is said to be elastic if tax revenues increases
more than proportionately in response to a rise in the tax base. If the tax revenue shows less
responsiveness to tax base, that type of tax base fails to generate enough revenue for the
government in the long run.
In line with its mandate of assessing, collecting, and accounting for tax, customs and other
specified non tax revenues, assisting taxpayers in understanding and meeting their tax
obligations thus raising their compliance, Rwanda Revenue Authority also analyses long-term
tax elasticity of tax in relation to changes in GDP in order to highlight tax gaps within a sector
.
It is also in this framework that profitability benchmarking based on business activities has to
be done in order to identify areas of irregularities in tax compliance hence taking actions for
tax collection optimization.
According to Azubike (2009), tax is a major player in every society of the world.Taxation is
most way to reduce foreign aid by mobilizing internal government resource which lead to
favorable conductive environment which lead to economic growth promotion.

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Nzotta (2007) argues that taxes constitute key sources of revenue to the federation account
shared by the federal, state and local governments.
That is why taxation system in Rwanda is divided into decentralized tax and fiscal tax and
others administrative fees from Rwanda online known as Irembo.
Oxford Dictionary of Accounting (1995) defined taxation as a levy on an individual or
corporate body by the central or local government to finance the expenditure of that
government and also as a means of implementing its fiscal policy.
Abomaye-Nimenibo(2017) is of the view that tax is a compulsory contributions made by
animate and inanimate beings to government being a higher authority either directly or
indirectly to fund its various activities and any refusal is meted with appropriate punishment.
He went on to say that Tax is an involuntary payment made by a resident of a state in obeisance
to levy imposed by a constituted authority of a sovereign state at a particular period of time;
and that Taxation is the process put in place by government (which ever tier) to exercise
authority on and over the imposition and collection of taxes based on enacted tax laws with
which projects are financed. Taxation is therefore seen as the transfer of resources as income
from the private sector to the public sector for its utilization to achieve some if not all the
nation’s economic and social goals such as provision of basic amenities, social services,
educational facilities, public health, transportation, capital formation etc.
However ,one of main function of government is to infrastructure service development
generation such as roads, schools, hospitals ,defense, pipe-borne water,… as well as ensure
the rise of per capita income and to achieve other macroeconomic factors such low
unemployment, inflation, Balanced of problem balance ,Economic growth, to reduce income
inequality,..
For above service and argument to be efficient at optimum level, government need sufficient
resource to finance them. The task of financing government expenditure and allocating
national resource is main responsibilities and challenges due to limited government resources
.therefore individuals, companies and government body must provide tax based on Rwanda
taxation law. Government always think how to modernized tax revenue by reforming law .
These law aim to ensure to promote tax compliance and to discourage tax evasion and tax

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avoidance. The purpose of this study is to show the impact of aid on economic development
of Rwanda
1.1. THE PROBLEM STATEMENT
Rwanda and others countries globally especially in Africa are nowadays facing series of
challenges when it comes to optimizing tax revenue and tax to GDP ratio for economic growth
and development .While aiming to reach sustainable development objectives. The most
obvious difficult challenge is how to find the optimal balance between a tax regime that is
employees, business and investment friendly while at the same time leveraging enough revenue
for public service delivery which in turn makes the economy more attractive to financiers.
In addition, tax compliance in Rwanda is doubtable as many prefer not to pay tax. As a result
of the unwillingness to pay tax as well as evading tax, the economy therefore continues to lose
huge amount of revenue. If this lost tax revenue came back into the economy and well utilized,
can change the wealth of the nation. In developing countries like Rwanda, this problem has
been persistent for so long which requires serious attention and solution.
Therefore, assessing the impact of tax revenue on development in Rwanda from during 10years
from 2007 to 2017 is a research work carried out at the right time as there is an urgent need to
examine more deeply and to look into the relationship between direct tax , tax on goods and
services and tax on international trade and transaction on economic growth and development
of Rwanda in Rwanda. This study will not only guarantee improved revenue base for the
Rwanda but also take full advantage to African Tax Administration Forum members and
global economies. Therefore, this research work examines the impact of tax revenue on
economic growth in Rwanda by analyzing the tax gap in the system over the years and so
revealing the critical challenges that needs to be outgrowth. Hence, the need for further study
of the tax performance and its influence on the economic development of Rwanda.
1.2. OBJECTIVE OF STUDY
The general objective of this study is to find out how extend tax revenue impacts on economic
growth in Rwanda from 2007 to 2017. The specific objectives of the study are to:

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i. To analyze the relationship between direct tax and economic growth in
Rwanda;
ii. To examine the relationship between tax on goods and services and economic
growth in Rwanda; and
iii. To find out the relationship between tax on international trade and transaction
and economic growth in Rwanda
1.4. RESEARCH QUESTIONS
The research question of this study is concern about what is impact of tax revenue on economic
growth in Rwanda from 2007 to 2017?
1.5. HYPOTHESIS
This research work is guided to know if tax revenue components impact positively or
negatively by developing null and alternative hypotheses below:
i. H0 : There is no positive significant relationship between direct tax and economic
growth in Rwanda
H1: There is positive significant relationship between direct tax and economic growth
in Rwanda
ii.H0: There is no positive significant relationship between tax on goods and services and
economic growth in Rwanda
H1:. There is positive significant relationship between tax on goods and services and
economic growth in Rwanda.
iii..H0: There is no positive significant relationship between tax on international trade and
transaction and economic growth in Rwanda.
H1: There is positive significant relationship between relationship between tax on
international trade and transaction and economic growth in Rwanda.
1.6 SCOPE OF THE STUDY:
The scope of this study covers critical examinations on the impact of taxation on economic
development. In order to analyze the relationship between tax revenues and Gross Domestic

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Product, Quarterly data for the period of 2007Q1 to 2017Q4 were used for these two variables
from RRA and NISR.
1.7 SIGNIFICANCE OF THE STUDY:
One of the most frequently discussed issues in Rwanda is how to solve the economic hardship
in the country and how Tax revenue induces economic development. Also many elite people
around the world wonder reason why a country which is landlocked as Rwanda it’s economy
is green and it is not heavily indebted country.
The study afforded us the opportunity to know the impact of tax revenue in economic growth
of Rwandan economy in 10 years
1.9 DEFINITION OF KEY CONCEPTS
CIT: it is an assessment levied by government on profit of the company.
Development economics is a branch of economics which deals with economic aspects of the
development process in low income countries.
Direct tax is set of Pay As You Earn (PAYE), Taxes on Corporations & Enterprises and Tax
on property (Property tax on Vehicles)
Economic development is the process by which the well-being of a nation improves because
of progress in technology, progress in science and also because of general economic growth
and innovation for country including Rwanda; it is the process by which a nation improves the
economic, political, and social well-being of its people.
Excise tax is a tax that is measured by the amount of business done (not on property or income
from real estate) excise. Indirect tax, it is a tax levied on goods or services rather than on
persons or organizations. nuisance tax, sales tax.
Gross domestic Product (GDP) is a monetary measure of the market value of all the final
goods and services produced in a period (quarterly or yearly) of time

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Income per capita is a measure of the amount of money earned per person in a certain area.
Macro environment includes trends in gross domestic product (GDP), inflation, employment,
spending, and monetary and fiscal policy.
MINECOFIN is Ministry of finance and economic planning; it was formed in March 1997
from the joining of the Ministry of Finance and the Ministry of Planning. This was done in
order to improve the co-ordination between the functions of finance and planning. In the
ministerial re-structuring of February 1999, the Ministry took on the function of development
cooperation from the Ministry of Foreign Affair.
Monetary policy is the macroeconomic policy laid down by the central bank like national
bank of Rwanda. It involves management of money supply and interest rate and is the demand
side economic policy used by the government of a country to achieve macroeconomic
objectives like inflation, consumption, growth and liquidity.
National Bank of Rwanda, established by the Law of 24th April 1964, came into force from
19th May 1964 with the aim of fulfilling one of its main missions, namely the issuing of
currency on the Rwandan territory. Vision of national bank of Rwanda is to become a World-
Class Central Bank
Nontax means it is government revenue not generated from tax such fine, fees, licenses,
government rent, concession, royalties,…
PAYE: A pay-as-you-earn tax or pay-as-you-go is a withholding tax on income payments to
employees.
PIT: It is tax imposed on individuals or entities (taxpayers) that varies with perspective in
come or profit
Profit Tax is composed by corporate income tax (CIT) and personal income tax(PIT)
RRA is Rwanda Revenue Authority. It is government body under Ministry of finance and
economic planning (MINECOFIN) which is responsible for Tax revenue matters.

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Socioeconomic status (SES) is an economic and sociological combined total measure of a
person's work experience and of an individual's or family's economic and social position in
relation to others, based on income, education, and occupation.
Tax Avoidance: This can be describe as the arrangement of tax payers' affairs using the tax
shelters in the tax law, and avoiding tax traps in the tax laws, so as to pay less tax than he or
she would otherwise pay. That is, a person pays less tax than he ought to pay by taking
advantage of loopholes in a tax levy (Samuel and Tyokoso, 2014).
Tax Base:Total of taxable assets, income, and assessed value of property within the tax
jurisdiction of a government. To assess tax base we normally look at GDP, Population and
taxpayer.
Tax Evasion: Tax evasion is a deliberate and willful practice of not disclosing full taxable
income so as to pay less tax. In other words, it is a contravention of tax laws whereby ataxable
person neglects to pay the tax due or reduces tax liability by making fraudulent or untrue claims
on the income tax form, (Samuel and Tyokoso, 2014).
Tax Incidence: It offers to the effect of and where the burden is finally rested.
Tax Rate The percentage rate at which tax is charged. It can be Consumption Tax is a tax on
the money people spend, not the money people earn, Progressive Tax is a tax that is higher for
taxpayers with more money, A regressive tax is one that is not progressive, Proportional Tax
is the same as a flat tax.
Tax: A compulsory levy by the government on its citizen for the provision of public goods
and services.
Taxes on goods and services is the set of Value Added Tax (VAT), Excise Duty, Road Fund,
Mining Royalties, Strategic reserves levy)
Taxes on international trade and transactions is the set Import Duty, Other Customs
Revenues, Infrastructure development levy and others regular tax

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Tax-to- GDP ratio is an economic measurement that compares the amount of taxes collected
by a government to the amount of income that country receives for its products (GDP).
The African Tax Administration Forum (ATAF) is a platform promoting cooperation,
knowledge sharing and capacity building among African tax administrations. This is achieved,
among other approaches, through conducting and making available applied tax research that
can be used fruitfully by African tax administrations, policy makers, researchers and other
stakeholders.
The Fiscal Policy is the decisions taken by the government with respect to its revenue
collection (through taxation), expenditure and other financial operations to accomplish certain
national goals.
VAT: Value Added Tax is a multistage tax levied and collected on transactions at all
stages of sales and distribution.
Withholding Tax: This is tax charged on investment income namely: rents, interest,
royalties and dividends, presently it is charged as the tax offset

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1.10. ORGANIZATION OF THE STUDY
This study was divided into five chapters: Chapter one is general introduction and it is
composed by the background of the study, Statement of the problem, Research hypothesis,
Objectives of the study, Rationale of the study, and the Scope of the study, crucial definition
of taxation and finally organization of this study.
Chapter two presents the literature in relation to the topic under study, this chapter deals with
the historical background of taxation in general and Rwanda context, Conceptual framework,
Theoretical framework and studies related to this study.
Chapter three briefly highlights the various research methods, simply this chapter indicates
Data Collection, Sources of Data, Data Collection Procedure, Data Processing and Data
analysis. Chapter four presents data analysis and interpretation of the results. It shows the index
of data analysis in a scientific way using software and various tools such as tables, graphs,
charts, etc.
Chapter five revealed summary of findings, conclusion and recommendations. In this study,
researcher will combine, both qualitative and quantitative, so as to gain an insightful analysis
of the relevant facts and figures in explaining impact of tax revenue on economic growth in
Rwanda.

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CHAPTER- 2 LITERATURE REVIEW
2.1 INTRODUCTION
The study observes the ideas or views of various authors who took keen interest in the subject
matter. Basically, the review was done on the following sub-headings of historical background,
conceptual framework, theoretical framework, related case studies and summary of the
literature reviewed.
2.2 HISTORICAL BACKGROUND OF TAXATION IN GENERAL AND RWANDA
CONTEXT
Taxation is said to have come into existence “from time immemorial” without a specific
mention of when exactly it evolved. However, the origin of tax levies can be traced to the
ancient cities of Greek and Rome in modern literature; but from the Bible account, it has been
as old as the world. In these so called cities of Greek and Rome, taxes were levied on
consumption, saving, investment and properties (Abomaye-Nimenibo, 2017). From the
account of St. Mark’s gospel (chapter 12:14-16), a disciple of Jesus Christ precisely St. Peter
was reported in the Holy Bible was confronted by the tax authorities and he met Jesus Christ
who commanded him to get money with which Peter paid for himselve and the Lord Jesus
Christ. St. Mathewgospel chapter 17:24-27 of the Holy Bible, stated that our Lord Jesus Christ
Himself paid tax. Furthermore, in Matthew 19:21 we see tax money having its functions to
perform in the society which enables government authorities to use in providing social services
that will be enjoyed by all the citizens of a country. Such social services include the provision
of health and education, maintenance of law and order, provision of basic amenities and
infrastructures etc. Tax payment is therefore part of the price to be paid by sound members of
an organized and orderly society
In Rwanda, The history of taxation in Rwanda indicates that the first tax legislation was
inherited from colonial regimes. This tax legislation included the Ordinance of August 1912,
which established graduated tax and tax on real property. There was another Ordinance on
15thNovember 1925 adopting and putting into application the order issued in Belgian Congo
on 1stJune 1925, establishing a profits tax. This law was amended by law of 2nd June 1964
establishing Direct tax on profit. A substantive law governing customs was ratified on 17th
July 1968 accompanying the Ministerial Order of 27th July 1968, putting into application the

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Customs Law. This law was amended from time to time in order to comply with the changing
economic environment. Such other legislative instruments include the 1973 law governing
property tax, the tax on license to carry out trade and professional activities, the Law No. 29/91
of 28th June 1991 on sales tax (turnover tax) now repealed and replaced by the Law No.
06//2001 of 20/01/2001 on the Code of Value Added Tax (VAT). In 2005, the parliament
adopted law number No25/2005 of 04/12/2005 on tax procedures, amending Decree-Law of
December 28, 1973 relating to Personal Tax, Law No 06/2001 of January 20, 2001 on the Code
of Value Added Tax and Law No 9/97 of June 26, 1997 on the Code of Fiscal Procedures.
Similarly, Law No 16/2005 OF 18/08/2005 2005 on direct taxes on income was adopted
replacing Law No 8/97 of 26/6/1997 on Code of Direct Taxes on Different Profits and
Professional Income, and Law No 14/98 of December 18, 1998 establishing the Rwanda
Investment Promotion Agency, especially in its Articles 30, 31 and 34.
The parliament also adopted Law No. 21 of 18/04/2006 establishing the customs law, replacing
the Law of July 17th 1968 concerning the Customs law as amended and completed to date.
However, on July 1, 2009, Rwanda adopted the EAC Customs Management Act 2004, An Act
of the Community to make provisions for the management and administration of Customs and
for related matters

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2.3. CONCEPTUAL FRAMEWORK
The diagram below represents the independent and dependent variables. Since there are many
variables, the researcher shall concentrate on three most important variables such as
Independent variable, Dependent variable, and Intervening variables. This conceptual
framework interlinks those three types of variables following their interdependence. It is clear
that direct tax, Tax on goods and services and international trade and transaction as
independent variable impact on the economic growth as a dependent variable.
Diagram1: Conceptual framework
Source: Researcher
Independent variables
-Direct tax ( DT)
-Tax on goods and services
(TGS)
-Tax on international trade
and transactions(TITT)
Dependent variables
Economic growth(GDP)
Fiscal Policy
Intervening variables

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2.4. Theoretical framework
2.4.1Introduction on theoretical framework
This study review three theories of taxation: the cost of service theory, the benefit theory and
the socio - political theories of taxation. According to the cost of service theory, the cost
incurred by government in providing certain services to the people must collectively be met by
the people who are the ultimate receivers of the service (Jhingan, 2009). This theory believes
that tax is similar to price. So if a person does not utilize the service of a state, he should not
be charged any tax. Some criticisms have been leveled against this theory. According to
Jhingan (2009), the cost of service theory imposes some restrictions on government services.
The objective of government is to provide welfare to the poor. If the theory is applied, the state
will not undertake welfare activities like medical care, education, social amenities, etc.
furthermore, it will be very difficult to compute the cost per head of the various services
provided by the state, again, the theory has violated the correct definition and tenets of tax,
finally the basis of taxation as propounded by the theory is misleading.
The limitations inherent in the cost of service theory led to the modernization of the theory.
This modification gave birth to the benefit received theory of taxation. According to this
theory, citizens should be asked to pay taxes in proportion to the benefits they receive from
the services rendered by the government. The theory assumes that there is exchange
relationship or quid pro quo between tax payers and government. The government confers
some benefits on tax payers by providing social goods which the tax payers pay a consideration
in the form of taxes for using such goods. The inability to measure the benefits received by an
individual from the services rendered by the government has rendered this theory inapplicable
(Ahuja, 2012).
The socio-political theory of taxation states that social and political objectives should be the
major factors in selecting taxes. The theory advocated that a tax system should not be designed
to serve individuals, but should be used to cure the ills of society as a whole (Bhartia, 2009).
This study is therefore anchored on this theory.

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According to Bhartia (2009), a tax revenue theory may be derived on the assumption that there
need not be any relationship between tax paid and benefits received from state activities. We
shall accordingly lookatsome of such theories as discussed below.
2.4.2. Socio-Political Theory
This theory of tax revenue states that social and political objectives should be the major factors
in selecting taxes. The theory advocated that a tax system should not be designed to serve
individuals, but should be used to cure the ills of society as a whole.
2.4.3. Benefit Received Theory
This theory is based on the assumption that there is basically an exchange relationship between
tax-payers and the state because the state provides certain goods and services to the members
of the society, therefore, members of the society should contribute to the cost of these supplies
in proportion to the benefits received (Bhartia, 2009). Anyanfo (1996),supports this postulation
by saying that taxes should be allocated on the basis of benefits received from government
expenditure.
2.4.4 Faculty Theory
According to Anyanfo (1996), this theory states that one should be taxed according to the
ability to pay. It is simply an attempt to maximize an explicit value judgment about the

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distributive effects of taxes. Bhartia (2009), shares this same view by arguing that a citizen is
to pay tax just because he can, and his relative share in the total tax burden is to be determined
by his relative paying capacity.
2.4.5 Expediency Theory
This theory asserts that every tax proposal must pass the test of practicality. It must be the only
consideration weighted by the authorities in choosing a tax proposal. Economic and social
objectives of the state and the effects of a tax system should be treated as irrelevant
(Bhartia,2009). Anyafo (1996) and Bhartia (2009) explained that the expediency theory is
based on a link between tax liability and state activities. It assumes that the state should charge
the members of the society for the services provided by it. This reasoning justifies imposition
of taxes for financing state activities by inferences, which provides a basis, for apportioning
the tax burden between members of the society. This proposition has a reality embedded in it,
since it is useless to have a tax which cannot be levied and collected efficiently.
Pressures from economic, social and political groups abounds in every economy. Every single
group tries to protect and promote its own interests and by extension, authorities are often
forced to reshape tax structure to accommodate these pressures. In totality, the administrative
set up may not be efficient enough to collect taxes at a reasonable cost of collection. Tax
revenue therefore, provides a powerful set of policy tools to the authorities and should be
effectively used for remedying economic and social ills of the society such as income
inequalities, regional disparities, unemployment, and cyclical fluctuations and so on.
Adolph Wagner advocated that social and political objectives should be the deciding factors in
choosing taxes. Wagner did not believe in individualist approach to a problem. He stated that
each economic problem be looked at in its social and political context and an appropriate
solution found thereof. Accordingly, a tax system should not be designed to serve individual
members of the society, but should be used to cure the ills of society as a whole. This theory
relates to a normal development process and represents a benchmark against which,a country’s
specific empirical evidence may be compared.

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This study therefore focuses on the expediency theory which enables us to assess the extent to
which the Rwanda tax system conforms to this scenario where the link between tax liability
and economic activities are linked. Where applicable, such a characterization will enhance
accurate tax revenue projection and targeting of specific tax revenue sources given an
ascertained profile of economic development. It will also assist in estimating a sustainable
revenue profile thereby facilitating effective management of a country‘s fiscal policy, among
others. This is because the expediency theory focuses on the fact that taxes are collected to
achieve economic objectives which enhances the growth and development of a society in all
its spheres. The socio-political, benefit and faculty theory are relevant also but they lay more
emphasis on political relationship and ability to be objectives.
2.4.6 Concept of Economic Growth
Beardshaw et al (2001) define economic growth as an increase in the overall output of an
economy over a given period of time; the overall output of an economy is also called national
product. Growth of an economy in a given year is measured by the change in national output
as a percentage of the national output achieved in the previous year.
The Keynesian four sector expenditure approach model of determination of national income
explains how the equilibrium level of national income is determined by adding up all
expenditures made on goods and services during a year. Income can be spent either on
consumer goods or capital goods. Again, expenditure can be made by private individuals and
households or by government and business enterprises. Further, people of foreign countries
spend on the goods and services from other countries. These various expenditures are added
up to obtain national income (as shown in Equation 3.1 below).
GDPMP = C + I + G + (X – M) ……………………………………. (3.1)
Where
GDPMP = Gross Domestic Product (at Market Prices)

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C = Final private consumption expenditure (expenditure on consumer goods and services by
individuals and households).
I = Gross domestic capital formation or gross domestic investment (expenditure by productive
enterprises on capital goods and inventories or stocks). This is divided into two parts: Gross
fixed capital formation and addition to the stocks or inventories of goods.
G = Government final consumption expenditure (government’s expenditure on goods and
services to satisfy collective wants).
X = Export expenditure (expenditure made by foreigners on goods and services of a country)
M = Import expenditure (expenditure by people, enterprises and government of a country on
goods and services produced in other countries)
The simple Keynesian model of income determination treats government final consumption,
gross domestic capital formation (investments) and exports as autonomous expenditures.
Private final consumption expenditure and import expenditures on the other hand have a
constant exogenous component and that level of expenditure that depends on income (as shown
in equations 3.2 and 3.3 below):
C = a +bY ………………………………………………... (3.2)
Where C is private final consumption expenditure; a is autonomous consumption; and b is
marginal propensity to consume.
M = 𝑀̅ +mY ……………………………………………… (3.3)
Where 𝑀̅ is autonomous imports and m is marginal propensity to import.
The equilibrium level of income in a three sector model is thus given by:
Y =a +b(Y –T)+I +G ……………………………………. (3.4)
Where T is the lump-sum income tax.
Y -bY = a +bT +I +G
Y =
1
1−𝑏
(a +bT +I +G) ……………………………………. (3.5)

20. P a g e 20 | 48
Differentiating equation 3.5 with respect to lump-sum tax T will give us the effect of a
change in T on income Y
𝛿𝑦
𝛿𝑇
=
Δ
Δ𝑇
[(
1
1−𝑏
(a +bT +I +G ]
=
−𝑏
1−𝑏
………………………………………………………… (3.6)
Equation 3.7 shows that tax multiplier, is negative meaning an increase in lump-sum tax by
Δ𝑦
Δ𝑥
will reduce equilibrium income by a multiple.
Incorporating proportional income tax (tax levied as a fixed percentage or proportion
irrespective of the level of income) into the three sector Keynesian model of income
determination, then proportional income tax would mathematically be expressed as tY where
tis the rate of proportion of income which is payable as a tax. In a real economy, proportional
income tax may be imposed along with any lump-sum tax. Thus, the total tax
Δ𝑦
Δ𝑥
can be expressed as
T= tY ……………………………………………………………… (3.7)
Where t= rate or proportion of income tax and Y = income.
Equilibrium income, Y = a +b(T-Ty) +I +G ………………………… (3.8)
Y –by+bYt= a +I +G
Y=
1
1−𝑏−𝑏𝑡)
(a +I +G)
Y=
1
1−𝑏(1−𝑡)
(a +I +G) …………………………………………………… (3.9)
Equation 3.10 shows that proportional income tax has a negative multiplier effect on income.
Exports less imports (X – M) estimates net exports of a country in a four sector model of
income determination. The exports and imports of a country depend to a great extent on the
level of economic activity (that is, the level of output and income of a country) in such a way
that, as a country’s industrial output grows, it will generate greater demand for imported
materials and also cause the country’s exports to rise provided there is adequate demand for
the output in foreign markets.

21. P a g e 21 | 48
The equilibrium level of output in a four sector economy is thus given as:
Y =a +b(Y –T)+I +G+[X -(𝑴̅̅̅̅ +mY)]……………………………………. (3.10)
Where T is constant lump-sum tax.
a +bY –Tb+I +G+X -𝑀̅ -mY…………………………. (3.11)
Y-by+My= a +bY –Tb+I +G+X -𝑀̅ …………………………. (3.12)
Y=
1
1−𝑏+𝑚
(a +bY –Tb+I +G+X -𝑀̅ ) ……………………………………… (3.13)
where the term
𝟏
𝟏−𝒃+𝒎
is known as the foreign trade multiplier whose value is determined by
marginal propensity to consume (b) and marginal propensity to import (m). Note that change
in any autonomous factor of the model such as a, I, G, X and𝑀̅ will cause a change in national
income by the amount of the foreign trade multiplier [
1
1−𝑏+𝑀
] times the change in the amount
of the factor. Thus, if exports increase by ∇Y =
1
1−𝑏+𝑚
∗ ∇Y.
Incorporating proportional income tax in the four sector model of income determination, then
only the term of foreign trade multiplier will change, the other terms of the model remaining
the same. Thus, if income tax is of form where is constant lump-sum tax, is the proportion of
income that is taken as tax. With the incorporation of proportional income tax, the value of
trade multiplier becomes: T= 𝑇̅ +Ty where T is constant lump-sum tax, t is the proportion of
income that is taken as tax. With the incorporation of proportional income tax, the value of
trade multiplier becomes:
𝟏
𝟏−𝒃(𝟏−𝒕)+𝒎
=
1
1−𝑏+𝑡𝑏+𝑚
………………………………………. (3.14)
Where t is the proportional income tax rate. With this proportional income tax, the equilibrium
income equation can be written as
Y=
𝟏
𝟏−𝒃(𝟏−𝒕)+𝒎
(a +bY –Tb+I +G+X -𝑴̅ ) …….......... (3.15)
𝜹𝒚
𝜹𝑻
=
−𝒃
𝟏−𝒃+𝒕𝒃+𝒎
……………………………………….. (3.16)
Equations 3.16 and 3.17 shows that proportional income tax and constant lump-sum tax have
a negative multiplier effect on income.
2.4.7. ECONOMIC DEVELOPMENT
Rwanda embrace economic development since our nation is experienced dramatic
improvement in the sector of the economic, political, and social well-being of its people.
Economic development can also be referred to the quantitative and qualitative changes in the
economy

22. P a g e 22 | 48
Dafionone (2013), noted, “that for the country to lay claim on growth and development through
taxation, there must be an improvement of the quality of life of the citizens, as measured by
the appropriate indices in economic social, political and environmental term.
2.5 RELATED CASE STUDY
In an attempt to evaluate tax revenue and economic development of Rwanda, we are prone to
utilizing regression analysis for the period of 2007 – 2017. It will therefore be worthwhile to
look at the empirical literature.
Engen and Skinner (1996),also carried out a study of taxation and economic growth of U.S.
economy, using large sample of countries and evidences from micro level studies of labour
supply, investment demand, and productivity growth. Their findings revealed modest effects
on the order of 0.2 to 0.3 percentage and pointed differences in growth rates in response to a
major reform. They stated that such small effects can have a large cumulative impact on living
standards.
Brian (2007), analyzed the effects of tax revenue on economic growth in Uganda‘s experience
for the period 1987 to 2005. From the study, tax revenue was found to have had an impact on
the economic growth level of the country, with direct taxes having a positive effect while
indirect taxes had a negative impact. However, he stated that due to time, financial and data
constraints, not all essential issues could be analyzed. The issue arising from this work is the
fact that indirect taxes are not easily evaded when it comes to payment because they are paid
either at the time of consumption of the very good or service and at source and so one expects
that they should have a positive impact on a country’s’ economic growth not negative as
reported.
Babalola and Aminu (2011), also investigated the impact of taxation on economic growth in
Nigeria over the period 1977- 2009. They examined the Unit roots of the series using the
Augmented Dickey – Fuller technique after which the co-integration test was conducted using
the Engle – Granger Approach. Error correction models were estimated to take care of short-
run dynamics. The overall results indicated that productive expenditure did positively impacted
on economic growth during the period of coverage and a long-run relationship exists between
them as confirmed by the co-integration test.

23. P a g e 23 | 48
Ikem (2011), investigated the interaction between tax structure and economic growth in
Nigeria during the period 1961-2011. He made his analysis using two different econometric
models: the neoclassical growth framework and Granger causality test in examining the level
of impact and direction of causality respectively. The growth model was decomposed during
the analysis into long run static equation and short run dynamic error correction model. The
results revealed that income and CIT is statistically significant in promoting economic growth
in Nigeria.
The impact of tax revenue on economic growth has been examined severally by different
researchers. The empirical studies of Anyanwu (1997), Engen and Skinner, (1996), Tosun and
Abizadeh, (2005) and Arnold (2011), were used as the basis for different explanations of taxes
on economic.
According to Karran (1985) the tax revenue raised by the government depends to a large extent
on the state of the economy; therefore the relationship between tax revenue and economic
growth is an issue of great importance. Economic growth entails an increase in gross domestic
product overtime and is mainly linked to tax revenue through its effect on tax base. If tax
revenues are not sufficient to meet expenditure needs, the government must resort to
borrowing, printing money, selling assets, or slowing down the implementation of
development programs. All these actions generally damage the economy, especially the
poorest segment of the society.
Mansfied (1972) observes that high tax elasticity is a desirable characteristic of a tax system
since it allows growth in expenditure to be financed by raising tax revenue without the need
for politically difficult decisions to raise the taxes.
Karran (1985) identifies three models of tax revenue change: (i) Macroeconomic determination
model, (ii) consumer preference model and (iii) policy initiative model. Macroeconomic
determination model holds that changes in tax revenues are brought about by economic growth
and inflation. Economic growth may lead to increase in tax revenue by increasing the real value
of the tax base. Economic growth can also change purchasing patterns, thus altering the
revenues raised by particular taxes. Inflation has a direct effect on the revenue yield of taxes.

24. P a g e 24 | 48
If a tax base is measured in money terms and levied on a percentage basis it is buoyant with
respect to inflation; the increase in the money value of the base increases the revenue yield.
According to Heinemann (2001) tax revenue may be linked to changes in national income
through fiscal drag. Fiscal drag describes the phenomenon whereby inflation and economic
growth push more tax payers into higher tax brackets. This has the effect of raising tax revenue
without explicitly raising tax rates, or changing tax bases.
2.6 Relationship between Economic Growth and Tax Revenue evolution
from 2007 to 2017
Source: Authors’ computation based on RRA and NISR data
-
500
1,000
1,500
2,000
2,500
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
2015Q3
2016Q1
2016Q3
2017Q1
2017Q3
Nominal GDP
Total tax revenues

25. P a g e 25 | 48
During the past decade spanning from 2007Q1 to 2017Q4, Nominal GDP was 484billion to
1985billion from 2007Q1 to 2017Q4 and Total tax revenues was 54billion to 306 billion
from 2007Q1 to 2017Q4.During the 2007Q1 to 2017, the tax-to-GDP ratio has increased
from 11.5 percent to 15.4 percent respectively.
Source: Authors’ computation based on RRA data
Looking at different components of each tax revenue, the figure 2 above shows that the taxes
on goods and services from is the biggest contributor with 28 billion to 166 billion from
2007Q1 to 2017Q4, direct taxes is second with 19 billion to 126 billion from 2007Q1 to
2017Q4 and lastly tax on international trade and transaction with 7 billion to 26 billion from
2007Q1 to 2017Q4
-
20
40
60
80
100
120
140
160
180
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
2015Q3
2016Q1
2016Q3
2017Q1
2017Q3
DT
TGS
TITT

26. P a g e 26 | 48
CHAPTER 3: RESEARCH METHODOLOGY
3.1. Introduction
This chapter describes the methodology was done on the following sub-headings of
introduction, research design, theoretical framework, Related case studies and summary, data
collection techniques and tools, data processing, methods of data analysis, limitation, ethical
consideration and model specification
3.2. RESEARCH DESIGN
A research design is a master plan specifying the methods and procedures for collecting and
analyzing the required information. Research design is the plans and the procedures for
research that span the decisions from broad assumptions to detailed methods of data collection
and analysis. The overall decision involves which design should be used to study a topic.
Informing this decision should be the worldview assumptions the researcher brings to the
study; procedures of inquiry (called strategies); and specific methods of data collection,
analysis, and interpretation.
The selection of a research design is also based on the nature of the research problem or issue
being addressed, the researchers’ personal experiences, and the audiences for the study. (
Creswell,2008,P .3) According to Grinner and Williams (1990,P.279), research design is the
entire process of the study, the problem formulation through dissemination of findings. It
sometimes used to refer to graphic presentation of the independent variables. According to
Churchill (1992:39), “a study design is simply the frame work or plan for the study used as a
guide in collecting and analyzing data”. The research design related to this study was based on
the techniques set at each objective to have all the objectives achieved.
3.2.2. DATA COLLECTION TECHNIQUES AND TOOLS
Data collection was done through the secondary Data. Rwanda Revenue Authority(RRA)
provides independent variable data as tax revenue and National institute of statistics of
Rwanda(NISR) provides nominal Gross Domestic product spanning from 2007Q1 to 2017Q4.

27. P a g e 27 | 48
3.2.3. DATA PROCESSING
This thesis investigates the impact of tax revenue on economic growth in Rwanda between
2007Q1 and 2017Q4. Many of economic and social changes have been taken place in Rwanda
during this period. It is very important to analyze and evaluate the factors that affected the
economic growth over this period. The data for the study have been collected from Rwanda
Revenue Authority(RRA) and National institute of statistics of Rwanda( NISR). To find out
the impact of tax revenue on the GDP and to test the study hypotheses, regression model were
used to test the relation between the dependent and independent variables. Therefore, multiple
regression model were developed to achieve the above objectives. In our model, GDP is the
in dependent variable while direct tax, tax on good and service and tax on international trade
and transaction are the independent variables. In this study we can analyze the impact of tax
revenue on the economic growth in Rwanda. The study covers Rwanda Revenue
Authority(RRA) and National institute of statistics of Rwanda(NISR) quarterly data spanning
from 2007Q1 to 2017Q4.
In this empirical study, data have been processed and information related to the hypothesis and
objectives of the study was taken into account and transformed into meaningful data for easy
interpretation and understanding. This has been carried out by the use of e-Views package 8.
3.2.4. DATA ANALYSIS
3.4 TECHNIQUES OF DATA ANALYSIS
In analyzing the data gathered regressions model was employed to establish the relationship
between dependent and independent variables. The study made use of economic approach in
estimating the relationship between tax revenue and economic growth. Vector error correction
model (VECM) was employed in obtaining the numerical estimates of the co-efficient in
different equation. The ordinary least square method was chosen because it possesses some
optimal properties. Its computational procedure is fairly simple

28. P a g e 28 | 48
3.8 LIMITATION
Like any other research, this research was encountered by the difficulties such as;
Inadequate funds to carry out the project, Personal extremely effort to meet deadline.
3.9 ETHICAL CONSIDERATION
For those who interest to read Bible,Matthew 19:21 we see tax money having its functions to
perform in the society which enables government authorities to use in providing social services
that will be enjoyed by all the citizens of a country. Therefore, we must have attitude and ethics
to pay to tax on time in order to build our nation.
3.10 MODEL SPECIFICATIONS
The method employed in this study, involves discussion of data collection analysis techniques.
We adopted a quasi-experimental research which is purely analytical. In this study we used
quarterly data covering the period from 2007 to 2017, from the Rwanda Revenue Authority
(RRA) statistical bulletin and annual reports and National institute of statistics of
Rwanda(NISR). The economic growth variable is nominal GDP at current basic prices. The
study uses three independent variables: direct tax including tax on property, taxes on goods
and services, taxes on international trade and transactions including others tax.
Authors such as Osoro (1993), Kusi (1998), Muriithi &Moyi (2003) and Bilquess (2004) used
the following models to estimate buoyancy and elasticity:
𝑇t= 𝛼Yt 𝛽 𝑒ε t
(1)
The logarithm transformation of the equation (1) give
LnT𝑡t = Ln𝛼+ 𝛽Ln𝑌𝑡 + 𝜀𝑡 (2)
Or Tax t = 𝜇0 + 𝛽𝑦𝑡 + 𝜀𝑡 (3)
Where Tax t = log (𝑇𝑡) and Y𝑡 = log (𝑌𝑡)
𝜀: Stochastic disturbance term

29. P a g e 29 | 48
In this this thesis, I am going to use the following models to estimate long run tax revenue and
economic development in Rwanda: LnGDP = ƒ(LnDT, LnTGS, lnTITT,) ………. (4)
The estimable econometric model is shown in equation as
LnGDP = α + β1LnLDT + β2LnLTGS +β3LnLTITT + εt .. (5)
Where
LnGDP = Natural logarithm of Gross Domestic Product
LnDT = Natural logarithm of Direct tax
LnTGS = Natural logarithm of Tax on Goods and Services
LnTITT = Natural logarithm of Taxes on International Trade Transactions
Dummy Variable for Direct taxes (DM_DT)
Dummy Variable for Taxes on goods and services (DM_TGS)
Dummy Variable for Tax on international trade and transactions DM_TITT)
β1, β2, β3 is regression parameters
εt is : stochastic error
Therefore,In order to capture short run dynamics, we estimate Vector Error Correction Models
(VECM)

30. P a g e 30 | 48
3.11 DEFINITION OF VARIABLES AND THEIR EXPECTED SIGNS
Definition of variables used, their estimation coefficients and expected signs of each
explanatory variable.
Figure 2.definition of variable and expected sign
Variable Definition Estimation
coefficient
Expected Sign
GDPt Gross domestic product can be defined as the total
monetary value of all finished goods and services
produced within a country’s borders in a specified
time period
This is the
dependent
variable
DTt
Direct tax is set of Pay As You Earn (PAYE), Taxes
on Corporations & Enterprises and Tax on property
(Property tax on Vehicles)
.
β1 Positive
TGSt
Taxes on goods and services is the set of Value
Added Tax (VAT), Excise Duty, Road Fund, Mining
Royalties, Strategic reserves levy)
Β2 Positive
TITTt Taxes on international trade transactions are indirect
taxes and include custom duties and other taxes on
international trade and transactions. These are
imposed by the government on trade transactions
involving exchange of goods and services between
home country and foreign countries.
β3 Negative
Source: Author’s computations

31. P a g e 31 | 48
CHAPTER- 4 DATA ANALYSIS AND INTERPRETATION
4.1 Introduction
In this chapter, the researcher used to apply the econometrics method in order to verify the
research hypotheses of the study, the researcher has developed different points like: summary
statistics, correlation matrix, specification of the model, expected signs, data processing,
model estimation and diagnostic tests by using the data of Rwandan economy on the period
from 2007Q1 up to Q42017Q4.
4.2 SUMMARY STATISTICS
The table below summarized quantitative data using mean, median, maximum, minimum,
standard deviation, skewness and kurtosis. The results are displayed in Table 1 below.
Table 1: Summary Statistics
LGDP LDT LTGS LTITT
Mean 6.975523 4.043814 4.282138 2.590486
Median 7.040119 4.142989 4.303782 2.58242
Maximum 7.593374 4.835751 5.043064 3.243469
Minimum 6.182085 2.937524 3.322205 1.933846
Std. Dev. 0.388659 0.546176 0.499604 0.386691
Skewness -0.30232 -0.32776 -0.23712 0.024329
Kurtosis 2.099475 1.923937 1.936236 1.779536
Observations 44 44 44 44
Source: Eviews 8,2019
The statistics from Table 1 is based on 44 Quarterly observations from Q12007 to Q42017.
Over the study period, natural logarithm of Nominal GDP which is the dependent variable
ranged between a maximum value of 7.593374 and a minimum value of 6.182085, with an
average of 6.975523. It recorded a standard deviation of 0.388659, indicating that the data
cluster scatted away the average. The natural logarithm of DT has a mean of 4.043814, with
sample ranging between 4.835751 and 2.937524. LDT had a higher standard deviation of
0.546176 in the series. natural logarithm of TGS, recorded the mean of 4.282138 with standard
deviation of 0.499604 and a minimum and maximum value of 3.322205 and 5.043064
respectively. natural logarithm of TITT obtained the mean value of 2.590486 and the standard
deviation of 0.386691, a minimum value of 1.933846 and a maximum value of 3.243469.
4.3 CORRELATION MATRIX
Correlation matrix showed the Relationship between FDI dependent and independent
variables

32. P a g e 32 | 48
Table 2 Relationship between FDI dependent and independent variables
LGDP LDT LTGS LTITT
LGDP 1 0.98334 0.99452 0.89571
LDT 0.98334 1 0.97934 0.88471
LTGS 0.99452 0.97934 1 0.90128
LTITT 0.89571 0.88471 0.90128 1
Source: Eviews 8,2019
Table 2 shows the relationship between the dependent variable GDP with independent
variables DT, TGS and TITT.The correlation between GDP and DT, TGS and TITT is positive
and significant. It is noted that the highest relationship of 99.45% is exhibited by the correlation
between GDP and TGS. This implies that TGS is the most important variable correlated with
GDP for the period under consideration from Q12007 up to Q42017. TGS in correlation with
GDP is followed by DT and TITT respectively. That is to mean that there is a relationship
between independent variables with GDP in Rwanda during the period of study. However,
these preliminary results are insufficient for reaching a conclusion, and further tests will be
carried out in the following subtopics.
4.4 UNIT ROOT TEST (TEST FOR STATIONARITY)
Unit Root Test is done to ascertain whether the variables used in the model are normally
distributed (stationary) or non-stationary (i.e. have a unit root). This is done using the
Augmented Dicker-Fuller (ADF) Test as shown in Table 4.
Table 3: Augmented Dicker-Fuller tests for Unit Root at levels
Variable AugmentedD
ickey-Fuller
test statistic
MacKinnon(
1996) one
sided
pvalues
1% level
Critical
Value
5% level
Critical
Value
10%level
CriticalV
alue
Stationarity
LNGDP -2.02191 -3.60099 -2.935 -2.60584 0.2767 Non-stationary
LDT -2.75693 -3.60559 -2.93694 -2.60686 0.0737 Non-stationary
LTGS -1.74149 -3.62102 -2.94343 -2.61026 0.4027 Non-stationary
LTITT -1.27281 -3.59246 -2.9314 -2.60394 0.6336 Non-stationary

33. P a g e 33 | 48
Source: Author’s Computation
All variables have unit roots (i.e. non-stationary) at 5% and 10% levels of significance (as
shown in Table 4) and are therefore are subjected to 1st
differencing to meet the condition that
there should be no unit roots at 5 % and 10% levels of significance. .
Table 5: Augmented Dicker-Fuller tests for Unit Root after 1st
differencing
Variable Augmented
Dickey-
Fuller test
statistic
MacKinnon
(1996) one
sided pvalues
1% level
Critical
Value
5% level
Critical
Value
10% level
Critical
Value
Stationarity
LNGDP -5.42252 0.0001*** -3.60099 -2.935 -2.60584 Stationary
LDT -8.88959 0.0000*** -3.60559 -2.93694 -2.60686 Stationary
LTGS -5.42252 0.0000*** -3.60099 -2.935 -2.60584 Stationary
LTITT -8.0143 0.0000*** -3.59662 -2.93316 -2.60487 Stationary
***p<0.01
Source: Author’s Computation
After subjecting all the non-stationary variables to 1st
differencing, they all become stationary
at 5% and 10% levels of significance (as shown in Table 5). They are therefore integrated of
order 1 meaning they are stationary at the 1st
difference. The null hypothesis that the variables
have unit roots at first difference is thus rejected and conclusion made that the variables have
no unit roots at 1st
difference.
4.5 COINTEGRATION TESTS
Cointegration tests facilitate to establish if there is a long-term relationship between the
variables. Subject to proof of cointegration, that will be an indication that the variables share a
certain type of behavior in terms of their long-term fluctuations. However before testing for
cointegration, the lag length to incorporate in the model will be selected empirically. This will
ensure that the model avoids spurious rejection or acceptance of estimated results and to have
standard normal error terms that do not suffer from non-stationary, autocorrelation or
heteroscedasticity, the results are reported in Section 4.4.1.

34. P a g e 34 | 48
4.6 LAG LENGTH SELECTION CRITERIA
The selection of optimal lag length is used in the estimation of vector autoregressive (VAR)
model. This is important to avoid spurious rejection or acceptance of estimated results.
Table 3: Lag length criteria
VAR Lag Order Selection Criteria
Endogenous variables: LGDP LDT LTGS
LTITT
Exogenous variables: C
Date: 11/02/19 Time: 13:20
Sample: 2007Q1 2017Q4
Included observations: 41
Lag LogL LR FPE AIC SC HQ
0 100.9893 NA 1.04e-07 -4.731184 -4.564006 -4.670307
1 227.5260 222.2108* 4.74e-10* -10.12322* -9.287330* -9.818834*
2 241.8056 22.29014 5.28e-10 -10.03930 -8.534698 -9.491405
3 251.0213 12.58728 7.82e-10 -9.708356 -7.535045 -8.916956
* indicates lag order selected by the criterion
LR: sequential modified LR test statistic (each test at 5%
level)
FPE: Final prediction error
AIC: Akaike information criterion
SC: Schwarz information criterion
HQ: Hannan-Quinn information criterion
Table 5 Lag length criteria revealed that researcher should use a maximum of 1 lag in order to
permit adjustment in the model and accomplish well behaved residuals. Table 5 confirms the
lag lengths selected by different information criteria such AIC, SIC, Hannan-Quinn
Information Criterion (HQI), FPE and the Likelihood Ratio Test (LR) selected three lags,
therefore the information criteria approach produced agreeing results to adopt three lags.
therefore, the Johansen Cointegration Test is conducted using one lags for the Vector Auto
Regression.
4.7 JOHANSEN COINTEGRATION MODEL SELECTION
Table 6 shows the results of the Johansen Cointegration test used to investigate whether there
exists long-run relationship among the cointegrating variables
TABLE 6: Cointegration Rank Test (Trace)

35. P a g e 35 | 48
Unrestricted Cointegration Rank Test (Trace)
Hypothesized Trace 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Prob.**
None * 0.593373 63.0262 47.85613 0.001
At most 1 0.254132 25.2321 29.79707 0.1533
At most 2 0.198491 12.91741 15.49471 0.1179
At most 3 0.08268 3.624537 3.841466 0.0569
Trace test indicates 1 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Source: Eviews 8,2019
Table 6 revealed that Trace test indicates 1 cointegrating equation at the 0.05 level of
significant
Table 7: Cointegration Rank Test (Maximum Eigenvalue)
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized Max-Eigen 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Prob.**
None * 0.593373 37.79411 27.58434 0.0017
At most 1 0.254132 12.31469 21.13162 0.5169
At most 2 0.198491 9.292868 14.2646 0.2626
At most 3 0.08268 3.624537 3.841466 0.0569
Max-eigenvalue test indicates 1 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
Source: Eviews 8,2019
Table 7 revealed that Maximum Eigenvalue test indicates 1 cointegrating equation at the 0.05
level of significant.
Since both tests reveal that the variables under study are cointegrating. therefore, these
results reveal the existence of a long-run equilibrium relationship between the variables.
4.8 ESTIMATED LONG-RUN MODEL
The estimation of the Long-run model helps in discussing some classical tests like t-Test and
F-test, discussing about Adjusted R-squared (coefficient of determination), but also in making
a deeper analysis.

36. P a g e 36 | 48
Table 8: Long run relationship between dependent and independent variables
Variable Coefficient Std. Error t-Statistic Prob.
C 3.748438 0.05855 64.02121 0.0000
LDT 0.163171 0.052121 3.130639 0.0033
LTGS 0.603103 0.061307 9.837459 0.0000
LTITT -0.005913 0.034365 -0.172055 0.8643
R-squared 0.991228 Mean dependent var 6.975523
Adjusted R-
squared
0.99057 S.D. dependent var 0.388659
S.E. of
regression
0.037741 Akaike info criterion -3.629615
Sum squared
resid
0.056976 Schwarz criterion -3.467416
Log
likelihood
83.85154 Hannan-Quinn criter. -3.569464
F-statistic 1506.693 Durbin-Watson stat 1.333763
Prob(F-
statistic)
0.00000
Source: Eviews 8,2019
Table 8 Shows the results of long run relationship between dependent variable and the
independent variables and it is interpreted as follows:
The DT and TGS are two variables which were statistically significant to influence GDP in
Rwanda during the period of study.
The DT has been significant at 5% level of significance and possesses expected positive sign
in long run model, however the positive cointegrating coefficient of 0.163171 shows a positive
relationship between GDP and the DT in that a 1% increase in DT would increase GDP to
0.163171 %. The results confirm the expected sign, and this positive sign may mean that in the
long run, the biggest of host’s country market is likely to encourage GDP. DT is statistically
significant in explaining changes in GDP, suggesting that DT is an important factor in
influencing Rwandan GDP.
The effects of TGS on GDP: TGS has a positive effect on GDP and significant relationship
with GDP in Rwanda at 5% level of significance. the results show that increase in TGS by 1%
leads to 0.603103% increase to GDP in Rwanda.

37. P a g e 37 | 48
TITT has a negative effect on GDP and not significant relationship with GDP in Rwanda. TITT
is statistically insignificant in explaining changes in GDP during the period of Q12007 to
Q42017.
The coefficient of determination: the coefficient of determination (R2) is 0.99057. This means
that 99.06% of variations in the dependent variable GDP are explained by the independent
variables considered in the model.
The P-value of the F-statistic is 0.000000, which means the overall model is statistically
significant at 5% level of significance.
4.9 VECTOR ERROR CORRECTION MODEL
As the variables were non stationary at their levels integrated of order I(1),stationary at first
difference and cointegrated ,we analyzed the short run relationship among them by formulating
an error correction model. The logic behind that model is to recover the long run information
lost by differencing variables by introducing an error correction term gives the proportion of
shocks accumulated in the previous period that are corrected in the current period. The results
of VECM are presented in the following table.
Table 9: Vector Error correction model Results
Dependent Variable: D(LGDP)
Method: Least Squares
Date: 11/02/19 Time: 14:20
Sample (adjusted): 2007Q3 2017Q4
Included observations: 42 after adjustments
D(LGDP) = C(1)*( LGDP(-1) - 0.798843352892*LDT(-1) + 0.060223872029
1*LTGS(-1) + 0.0334606747663*LTITT(-1) - 4.08820567175 ) + C(2)
*D(LGDP(-1)) + C(3)*D(LDT(-1)) + C(4)*D(LTGS(-1)) + C(5)*D(LTITT(
-1)) + C(6)
Coefficient Std. Error t-Statistic Prob.
C(1) -0.142323 0.07576 -1.878597 0.0684
C(2) 0.205349 0.172688 1.189129 0.2422
C(3) -0.043396 0.046513 -0.932985 0.357
C(4) 0.026459 0.073927 0.357907 0.7225
C(5) -0.008059 0.030651 -0.262929 0.7941

38. P a g e 38 | 48
C(6) 0.026192 0.006795 3.854348 0.0005
R-squared 0.127675 Mean dependent var 0.03194
Adjusted R-squared 0.006519 S.D. dependent var 0.027286
S.E. of regression 0.027197 Akaike info criterion -4.239863
Sum squared resid 0.026628 Schwarz criterion -3.991624
Log likelihood 95.03712 Hannan-Quinn criter. -4.148873
F-statistic 1.053803 Durbin-Watson stat 1.884039
Prob(F-statistic) 0.401802
Source: Eviews 7,2019
Table 6 shows the findings of VECM and the results confirm that only the speed of adjustment
of the model is 14.2% with error correction of -0.142323 and it is statistically significant at
10%. This implies that 14.2% of errors realized in the previous Quarter are corrected in the
current one. This means that each quarter 14.2% of disequilibrium errors will be corrected due
to any change from the equilibrium.
4.7 GRANGER CAUSALITY TESTS
Granger Causality tests clarified how the variables affect (drive) each other. The results are
presented in Table 10 below.
Table 10: Granger Causality Tests
Null Hypothesis: ObsF-
Statisti
c
Prob. CONCLUSION
LDT does not Granger Cause
LGDP 432.74474 0.1054
LDT does not Granger Cause
LGDP
LGDP does not Granger Cause
LDT 25.5152
1.00E-
05
LGDP does Granger Cause
LDT
LTGS does not Granger Cause
LGDP 431.81716 0.1852
LTGS does not Granger Cause
LGDP
LGDP does not Granger Cause
LTGS 9.12791 0.0044
LGDP does Granger Cause
LTGS
LTITT does not Granger Cause
LGDP 430.00221 0.9627
LTITT does not Granger Cause
LGDP
LGDP does not Granger Cause
LTITT 5.68013 0.022
LGDP does Granger Cause
LGDP
Source: Elaborated by research using eviews 8,2019

39. P a g e 39 | 48
In this section, the study seeks to establish if there is evidence of a causal relationship between
the variables of interest.
 Since P-value=1.00E-05 or 0.001% is less than 5%, we reject null hypothesis of LGDP
does not Granger Cause LDT in order to accept alternative hypothesis of LGDP does
Granger Cause LDT. therefore, the results reflect that there is evidence of uni-directional
causality from LGDP to LDT.
 Since P-value=0.0044 or 0.4% is less than 10%, we reject null hypothesis of LGDP does
not Granger Cause LTGS in order to accept alternative hypothesis of LGDP does Granger
Cause LTGS. therefore, the results reflect that there is evidence of uni-directional causality
from LGDP to LTGS.
 Since P-value=0.022or 2.2% is less than 10%, we reject null hypothesis of LGDP does not
Granger Cause LTITT in order to accept alternative hypothesis of LGDP does Granger
Cause LTITT, therefore, the results reflect that there is evidence of uni-directional causality
from LGDP to LTITT.
4.8 DIAGNOSTIC TESTS
In econometrics analysis the diagnostic tests are important to check whether the assumptions
of tradition regression are confirmed.
These tests included Normal distribution test, Heteroscedasticity test, Autocorrelation test and
Stability test.
4.8.1 NORMALITY TEST
The hypothesis test is as follow
Ho: The residuals are normal distributed
H1 : The residuals are not normal distributed
The null hypothesis is rejected at 10% level of significant

40. P a g e 40 | 48
Figure 1: Normality test results
Source: Author’s computation (2019) by Eviews 8
Since the p-value 0.3462811 is greater than 10% level of significance, we fail to reject the null
hypothesis that the error term is normally distributed at 95 % confidence interval and
conclusion made that the error term is normally distributed.
4.8.2 SERIAL CORRELATION LM TEST
Table 12: Serial correlation LM Test
Breusch-Godfrey Serial Correlation LM Test:
F-statistic 1.188804 Prob. F(1,35) 0.2830
Obs*R-squared 1.379702 Prob. Chi-Square(1) 0.2402
Source: Eviews 7,2019
Table 4.10 reports the results of the first diagnostic test of autocorrelation. The null hypothesis
(Ho) claims that there is no autocorrelation while the alternative hypothesis (H1) claims the
opposite. The decision rule states that the null hypothesis (H0) should be rejected if the p-value
of observed R-squared is less than the 0.05 level of significance. Hence, there is no presence
of serial correlation in the estimated model, since the p-value of the observed R-squared is
0.2402 which is greater than the 0.05 level of significance.
4.8.3 HETEROSCEDASTICITY TEST
0
1
2
3
4
5
6
7
8
9
-0.10 -0.08 -0.06 -0.04 -0.02 0.00 0.02 0.04 0.06 0.08
Series: Residuals
Sample 2007Q1 2017Q4
Observations 44
Mean 2.88e-16
Median 0.003337
Maximum 0.071187
Minimum -0.094099
Std. Dev. 0.036401
Skewness -0.499066
Kurtosis 3.414288
Jarque-Bera 2.141154
Probability 0.342811

41. P a g e 41 | 48
Table 13: Heteroscedasticity Test result
Heteroscedasticity Test: Breusch-Pagan-Godfrey
F-statistic 0.919697 Prob. F(8,33) 0.5129
Obs*R-squared 7.657008 Prob. Chi-Square(8) 0.4677
Scaled explained SS 19.22575 Prob. Chi-Square(8) 0.0137
Source: Eviews 7,2019
Table 4.13 shows the results of the second diagnostic test of serial correlation. the null
hypothesis (Ho) claims that residuals are homoscedasticity and the alternative hypothesis
claims that the residuals are heteroscedastic and thus the variance is not constant. The rejection
rule states that the null hypothesis should be rejected if the probability value of observation R-
squared is less than the 0.05 level of significance. Since the probability of Chi-Square of 0.2402
is greater than 0.05, the test fails to reject the null hypothesis of constancy of variance among
the residuals in the model, and thus are deemed to be homoscedastic.
4.8.4 STABILITY OF THE MODEL
Figure 4. 2 cumulative sum model stability
Source: Author’s computation (2019) by Eviews 8
By analyzing the above graph, it was clear that the model is stable because the navigating blue
line of graph does not cross the borders (the straight lines represent critical bounds at 5%
significance level); this indicates that the GDP of Rwanda have been moving in a stable way
from 2007 to 2017
-20
-15
-10
-5
0
5
10
15
20
2009 2010 2011 2012 2013 2014 2015 2016 2017
CUSUM 5% Significance

42. P a g e 42 | 48
4.9 IMPULSE RESPONSE FUNCTION
The impulse response function IRF shows the dynamic properties of the model .it facilitates to
test the response of dependent variable to unit shock of independent variables.as it is presented
in the following tables of IRF, the vertical axis shows the deviation from the baseline of the
target variable in response to a change in one of the regressors,the horizontal axis also indicates
the number of years under which the explained variable tends to be affected after any shock
from one of the independent variables.
Figure 4.6. Impulse response of GDP to independent variables.
Figure 4.6 revealed that:
 Response of LGDP to LGDP means that, if one standard deviation shock is given to GDP,
how GDP shall be reacting. When one standard deviation shock is given to GDP, GDP
reacts positively.
 Response of LGDP to LDT means that, if one standard deviation shock is given to LDT,
how LGDP shall be reacting. When LDT has positive or negative shock, LDT positively.
 Response of LGDP to LTGS means that, if one standard deviation shock is given to LTGS,
how LGDP shall be reacting. When one standard deviation shock is given to LTGS, LGDP
reacts positively.
 Response of LGDP to LTITT means that, if one standard deviation shock is given LTITT,
how LGDP shall be reacting. When one standard deviation shock is given to LTITT, LGDP
reacts negatively
-.02
-.01
.00
.01
.02
.03
.04
1 2 3 4 5 6 7 8 9 10
Res pons e of LGDP to LGDP
-.02
-.01
.00
.01
.02
.03
.04
1 2 3 4 5 6 7 8 9 10
Res pons e of LGDP to LDT
-.02
-.01
.00
.01
.02
.03
.04
1 2 3 4 5 6 7 8 9 10
Res pons e of LGDP to LTGS
-.02
-.01
.00
.01
.02
.03
.04
1 2 3 4 5 6 7 8 9 10
Res pons e of LGDP to LTITT
Response to Cholesky One S.D. Innovations ± 2 S.E.

43. P a g e 43 | 48
CHAPTER -5 SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 INTRODUCTION
This chapter presents the summary, Conclusions and Recommendations for further research
5.2 SUMMARY
The study examines tax revenue and economic development of Rwanda from 2007to 2017.
The theoretical literature upon which this work hinged on included, socio-political theory,
expediency theory, faculty theory and benefit received theory.
Therefore, to achieve our objectives, data were collected on gross domestic product (GDP),
direct tax (DT), tax on goods and services (TGS) and Tax on international trade and
transactions (TITT) from Rwanda Revenue Authority(RRA) and National Institute of statistics
of Rwanda(NISR). The study adopted the Johensen co-integration , The results of the unit root
and the co-integration tests revealed that all variables are integrated of order one, I(1) and
cointegrated indicating the existence of a long-run equilibrium relationship among variables
included in the model and we use also Vector Error Correction Model (VECM) estimation
method for data analysis to estimate for short run result. The empirical findings showed that
direct tax(DT)and tax on goods and services(TGS) variables have positive at 0.1631 to 0.60
31 respectively and it impact on economic growth, while Tax on international trade and
transactions(TITT) variable has negative at -0.005913 and it is insignificant impact on
economic growth.
5.3 CONCLUSION
As conclusions , Johensen co-integration in analyzing the data collected on gross domestic
product (GDP), direct tax(DT),tax on good and service(TGS) ,Tax on international trade and
transaction(TITT) through secondary source namely Rwanda Revenue Authority(RRA) and
National Institute of statistics of Rwanda(NISR), our result shows direct tax(DT),tax on good
and service(TGS have positive impact on the gross domestic product(GDP) in Rwanda
Whereas Tax on international trade and transaction(TITT) have negative impact on the gross
domestic product(GDP) in Rwanda.

44. P a g e 44 | 48
5.4 RECOMMENDATIONS
This study recommends that the policymakers within government of Rwanda must improve
both direct tax and tax on goods and services (domestic tax) and increase Taxes on international
trade transactions (customs duties), it will harm economic growth of Rwanda therefore custom
duties must be rationally reduced or abolished and free trade zones like Africa continental free
trade area (AfCFTA) must create to foster increased exchange of goods and services across
borders.
Government of Rwanda should ensure that taxation is properly managed in a manner that will
accelerate economic growth, reduce inflation rate and generate employment in the country.
Government should ensure that tax revenue is judiciously used in the provision of basic
Education, social security Schemes, Agriculture development, Transportation, Primary Health
Care, adequate Power Supply, Construction of Roads and Bridges, National defense and
security, among others that will help the various sectors of the economy to grow and function
very well thereby enhancing the growth and development of the economy.
If economic growth and development has to be achieved in Rwanda, then government revenue
from tax should also be properly managed and judiciously be expended to provide basic
facilities to the taxpayers of Rwanda.
i Government should use the revenue generated from tax especially that of tax on goods
and services to develop the domestic sector of the economy especially in agriculture,
health, education and national security sectors
ii Government should sensitize the citizenry through awareness campaign and
enlightenment on the need to pay tax and not to evade it.
iii Government to encourage and also maintain on taxes remittance to Government
account via the e-payment system with will improves tax on international trade and
transaction components but also supporting the cashless economy.
iv Rwanda Revenue Authority needed to implement policies that will reduce the loop
holes in tax laws which tax payers capitalize on to evade tax. Like prohibiting tax
avoidance and tax evasion a punishable offence with serious sanctions imposed.

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2. Electronic resources
Rwanda Revenue Authority: www.rra.gov.rw
Ministry of finance and economic planning:www.minecofin.gov.rw
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Rwanda National Institute of Statistics: www.statistics.gov.rw
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APPENDICES
1. QUARTERS DATA USED FROM 2007Q1 to 2017Q4 in Rwandan francs
billion
Years Nominal GDP DT TGS TITT Total taxes
2007Q1 484 19 28 7 54
2007Q2 519 25 30 8 63
2007Q3 547 21 30 8 59
2007Q4 571 22 34 7 63
2008Q1 575 25 35 9 68
2008Q2 653 36 36 10 82
2008Q3 715 30 43 11 84
2008Q4 750 32 47 14 94
2009Q1 753 31 46 14 91
2009Q2 741 36 43 13 92
2009Q3 776 32 47 8 87
2009Q4 828 36 49 9 94
2010Q1 819 43 50 9 101
2010Q2 818 37 50 7 94
2010Q3 866 39 56 9 104
2010Q4 908 43 61 9 113
2011Q1 930 49 61 11 121
2011Q2 968 49 65 9 123
2011Q3 1038 45 69 10 124
2011Q4 1055 54 69 11 134
2012Q1 1074 61 72 12 145
2012Q2 1109 68 72 13 153
2012Q3 1175 56 78 17 151
2012Q4 1205 65 76 13 154
2013Q1 1186 82 77 12 172
2013Q2 1224 79 84 12 175
2013Q3 1225 71 89 15 175
2013Q4 1293 78 91 15 185
2014Q1 1321 77 94 18 189
2014Q2 1354 86 112 17 215
2014Q3 1396 82 106 17 205
2014Q4 1395 84 100 17 201
2015Q1 1422 95 101 17 212
2015Q2 1457 102 120 19 240
2015Q3 1522 85 120 18 224
2015Q4 1567 92 129 23 244
2016Q1 1596 109 121 20 250
2016Q2 1636 107 139 22 269
2016Q3 1689 98 129 21 248
2016Q4 1751 108 129 22 259
2017Q1 1820 122 138 23 283
2017Q2 1869 122 148 26 296
2017Q3 1927 109 144 23 276
2017Q4 1985 126 155 26 306

48. P a g e 48 | 48
SOURCE: Rwanda Revenue Authority( RRA)-Planning and Research department and
National Institute of Statistics in Rwanda(NISR)
DATA DESCRIPTION
GDP: Gross Domestic Product
DT : Direct tax (Pay As You Earn (PAYE)), Taxes on Corporations & Enterprises and Tax on
property(Property tax on Vehicles)
TGS: Taxes on goods and services (Value Added Tax (VAT), Excise Duty, Road Fund,
Mining Royalties, Strategic reserves levy)
TITT: Taxes on international trade and transactions (Import Duty, Other Customs Revenues,
Infrastructure development levy) and others regular tax