Determinants of Tax Revenue in East African Countries: Evidence from Sudan & Rwanda

Understanding the factors that influence its effectiveness remains a pressing challenge, particularly in East African countries like Sudan & Rwanda, where economic, institutional and policy dynamics vary significantly. This study aims to identify and analyze the key factors influencing tax revenue generation in East African countries, with a particular focus on the contrasting economic and institutional contexts of Sudan & Rwanda. Factors influencing tax revenue, such as GDP per capita, agriculture's role, inflation, foreign investments, trade openness and political stability, are complex and interconnected. The study employs an explanatory research design to understand the relationships influencing tax income. Utilizing a quantitative approach with secondary data from the World Bank spanning 30 years (1994-2023), the research employs a panel regression model capturing both cross-country and within-country dynamics. The panel regression model shows a strong fit with an R-squared of 0.819, indicating 82% of tax income variance explained. Noteworthy within-group R-squared is 0.615, while between- group R-squared is 1.000. The findings of this study reveal that GDP per capita significantly enhances tax revenue generation, emphasizing the role of economic growth in strengthening fiscal capacity. Conversely, a higher contribution to the GDP from the agricultural sector negatively affects tax revenue, highlighting structural challenges in taxing this sector. Interestingly, inflation and trade openness do not have a significant impact, suggesting that these factors may be less influential in the contexts of Sudan & Rwanda. However, foreign direct investment and political stability show negative effects on tax income, pointing to complex interactions that may require deeper policy analysis. These results underline the need for tailored tax policies that account for unique economic structures and governance contexts in East African countries.