Commodity price volatility, tax revenue, and welfare: evidence from Tanzania

Thumbnail Image
Journal Title
Journal ISSN
Volume Title
University of Dar es Salaam
Commodity prices remain inherently volatile in the global market, exerting pressure on tax revenue with the resulting change in prices and trade (export or import) volumes, as well as the adverse impact on production, consumption, resource allocation and household welfare. This study analyses the effects of commodity price changes and volatility on tax revenue and welfare using Tanzania as a case study. To accomplish this investigation, the study undertakes three tasks. First, it examined the association between commodity price change/volatility and tax revenue using time series data on Tanzania from 1980 to 2017. Second, using QUAIDS model in the compensation variation (CV) framework that accounts for static and dynamic effects, the study investigates the effects of agricultural commodity price changes on household welfare by comparing the period of high and low prices using Tanzania Panel Survey datasets from 2008 to 2015. Finally, using monthly auction coffee prices data from 1998 to 2017, the study examines the welfare consequences of reducing coffee price volatility. Different estimation techniques are employed to estimate effects of commodity price change and volatility on tax revenue and welfare. These include the dynamic Autoregressive Distributed Lag (ARDL), Three Stage Least Square, Compensating Variation (CV) and typical Lucas-like representative agent models. The findings show that, while commodity price change has a positive effect on tax to GDP ratio, commodity price volatility has negative effects. The welfare gain is associated with price increases; while the welfare losses are associated with declines in the prices of agricultural goods. Furthermore, the welfare losses are unevenly distributed depending on the net-market position and strata of the households. Finally, the finding shows that the welfare gains from reducing price volatility for coffee farmers in Tanzania are small. The study findings confirm the argument that, reliance on trade taxes is not favorable for Government's objective to optimize tax revenue because such taxes are adversely affected by commodity price volatility, hence the need to explore other opportunities for increasing tax revenue such as expanding tax bases. Clearly, the finding on welfare impact of reducing price volatility for coffee farmers imply that, measures to support farmers' productivity or value additions, and scaling up agricultural production with commercial focus could be a better strategy for improving the welfare of farmers.
Available in print form, EAF collection, Dr. Wilbert Chagula Library, (THS EAF HB221.T34J522)
Prices, Revenue management, Welfare economic
Joachim, Godfrey (2020) Commodity price volatility, tax revenue, and welfare: evidence from Tanzania ,Masters dissertation, University of Dar es Salaam, Dar es Salaam.