Assessing Tax Effort and Tax Buoyancy in Malawi: An ARDL Approach

Abstract

This study assesses tax effort and tax buoyancy in Malawi using an Autoregressive Distributed Lag (ARDL) model to analyze the responsiveness of tax revenue to macroeconomic factors. The findings indicate that Malawi’s tax system is less buoyant, with tax revenues responding more to short-term economic fluctuations than to long-term GDP growth. Inflation appears to be the most significant determinant of tax revenue, while tax effort indices suggest that Malawi collects revenues within its estimated capacity. However, inefficiencies in tax administration, structural economic constraints, and a high degree of informality limit the country’s ability to optimize revenue collection. The study highlights the need for broadening the tax base, improving tax compliance, and enhancing administrative efficiency to strengthen domestic resource mobilization. Key policy recommendations include reducing reliance on indirect taxation, addressing tax compliance issues, and leveraging technology to enhance tax administration. The study also identifies gaps in existing research, particularly the need for more granular analyses of sectoral tax performance and the role of governance in tax collection.