Does Tax Smoothing Exist in Africa? Evidence from a Panel of African Countries

We investigate evidence of tax smoothing in Africa using annual data from 1999 to 2021 for 31 African countries through two main approaches namely; 1) unit root testing, employing Augmented Dickey-Fuller (ADF), Phillips Perron (PP) and Im, Pesaran and Shin (IPS) tests for stationarity and 2) checking for the unpredictability of tax rates using the fixed and random effects models, and the two-step Generalized Method of Moments (GMM) to investigate the assumption of the unpredictability of changes in tax rates. Our findings reveal no evidence of tax smoothing in 7 out of 31 African countries namely Botswana, Democratic Republic of Congo, Cote D’Ivoire, Egypt, Equatorial Guinea, Lesotho and Mauritius while there is evidence in the remaining countries. Moreover, the IPS panel unit root test results showed evidence of tax smoothing in Africa. The study also finds that significant lag information about tax rates cannot predict changes in taxes in Africa. However, our analysis revealed that only last year's information about tax rates can predict changes in taxes and this is consistent in all the models. We therefore recommend that policymakers should improve institutional capacity for long-term fiscal planning and diversify revenue sources to mitigate reliance on unpredictable income streams. JEL CLASSIFICATION E62, H20, H30, H60, O55, C23