Impact of Corporate Income Tax on Economic Growth in Zanzibar

Abstract

This study investigates the impact of corporate income tax on economic growth in Zanzibar from 1990 to 2021. The study employed Vector-Error Correction Model (VECM) to examine the long-run and short-run impact of corporate income tax on economic growth. On the other hand, Granger-Causality-Test was used to determine the causal relationship between the corporate income tax and Economic growth in Zanzibar. The study integrated variables such as corporate income tax, value-added tax, excise duty, and economic growth from the year 1990 to 2021. Data were obtained from the World Bank and TRA websites.

The results revealed that, in the long run, corporate income tax had a significant positive effect on economic growth value. However, there was no short-run impact of corporate income tax on economic growth in Zanzibar during that period. The Granger causality test was employed to determine a causal relationship between corporate income tax and economic growth, and the results indicated a unidirectional causal effect from economic growth value to corporate income tax.

Furthermore, the study recommends that Governments should consider reducing rates since lower tax rates can encourage investment, promote entrepreneurship, and stimulate economic activity. Potentially leading to high economic growth. Also, the government should engage in a complete re-organisation of the tax administrative machinery to reduce tolerable problems of tax evasion and avoidance.