|
Abstract:
The purpose of this study is to examine the effect of tax on household consumption and to get an estimation of the optimal tax rate in Somalia. Time series data collected from World Development Indicators and the FAO Country Data were used. Generalized Method of Moments (GMM) model was applied to measure tax effect on consumption as Ramsey inverse elasticity was employed to calculate optimal tax. Unit root of the data and co integration between the series was tested.
Results from the GMM model indicate that there is an inverse relationship between taxes; price and the consumption where wage and none wage income have direct positive relation with consumption. The study found that all variables are none stationary at level but stationary at the first difference. Johansen co integration found that pairs of consumption, tax wage and none-wage income have long run relation and make equilibrium adjustment. Price is linked to consumption in the short run and it has no influence in long run adjustment.
Household consumption in Somalia is steadily decreasing at a decreasing rate; price level is also declining in response to demand reduction. The study found that petrol sugar should have been levied a low tax since they are income inelastic. Tax rates should be minimal for food unless the government is prepared to subsidize it.
|
