Econometric Analysis of the Impact of Taxes on Private Investment in Sub-Sahara Africa

Abstract

This study examines the impact of taxation and other macroeconomic factors on private investment in sub-Saharan Africa, taking the case of East African Community (EAC) and Southern African Development Community (SADC) countries. By estimating a dynamic neo-classical investment model for developing countries using One-Step Difference GMM, the empirical results indicate that corporate income tax (CIT) and Value Added Tax (VAT) have significant and negative effect on private investment. The results also show that real interest rate is an important factor that explains the level of private investment in the EAC and SADC countries. Credit to private sector, though found to be statistically significant, the results suggests its effect is unexplainably negative and inconsistent with economic theories. The study finds no evidence, however, on the impact of personal income taxes, real Gross Domestic Product (GDP) growth rate, nominal exchange rate and inflation rate on private investment. On the policy front, the study findings indicate that, governments from the two economic blocs need to consider lowering the corporate income tax and VAT tax rates if they are to promote and attract more private investments. Lowering interest rates through the monetary policy channel is also recommended to make their economies more attractive to potential investors.