Tax Instruments For Tanzania's Industrialization Growth

Abstract

The Tanzanian government aims to reshape the economy into a semi-industrialized nation by 2025. As a policy measure to support this reform, the government exempted producer capital commodities from value-added tax in 2017/2018 fiscal year. This aims to foster the utilization of these commodities in the manufacturing sector in order to generate economic growth, employment, and social well-being of the nation. This research examines the impact of macroeconomic fiscal instruments on the Tanzanian economy, by applying a static “Partnership for Economic Policy 1-1” standard Computable General Equilibrium model. We simulate a reduction of the value-added tax rate on producer capital commodities (electricity, machinery, electrical equipment, vehicles, and other equipment) under two different government closure rules. In the first simulation, government expenditures are fixed while government savings are flexible and adjust to changes in government revenue. Results show a decline in investment expenditure following a decrease in government savings and thus a negative impact on macroeconomic indicators. In the second simulation, government savings are fixed to maintain the budget deficit. The results show a decline in real Gross Domestic Product partly because of a decrease in output in governmental, some agricultural, and service sectors. Conversely, output increases for all manufacturing sectors, resulting in a lower average unemployment rate