Tax Revenue Instability in Sub-Saharan Africa: Does Institutional Quality Matter?

Abstract Sub-Saharan African countries (SSA) face a dual fiscal challenge: the need to increase tax revenue mobilisation and the issue of revenue instability. This paper contributes to those concerns by investigating the causal effect of institutional quality on tax revenue stability in Sub-Saharan Africa over the period 2000-2020. We exploit the UNU-WIDER data on government revenues and apply the Generalized Method Model (GMM) estimation technique to address endogeneity issues. The study shows that tax revenue instability is reduced by institutional quality. Notably, this stabilizing effect is more pronounced for revenues derived from indirect taxes as compared to those from direct taxes. This result is robust to changes in the measure of tax revenue instability, the quality of institutions, the sample and the time horizon. The analysis of heterogeneity indicates that the effect is more significant in resource-rich countries and in countries experiencing economic growth. The article's results are relevant to tax policy, specifically the necessary adjustments to improve tax revenue stability through institutional quality. JEL Classification: H21; O17; E02; O55; C23