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on Informal and Underground Economics |
| By: | Yimam, Seid; Asmare, Fissha |
| Abstract: | Many Sub-Saharan African countries, characterised by government budget deficits, have been undergoing reforms and improvements to enhance tax revenue collection. However, such improvements often fall short of expectations and do not yield the expected revenue. These economies are highly vulnerable to tax avoidance and tax evasion, mainly due to the lack of a strong, modernised tax system and limited administrative and enforcement capacity, plus poor awareness of paying tax among the business community. The Ethiopian government has been implementing activities to boost its tax collection capacity and hence tax revenue. Nonetheless, although the Ethiopian economy has been growing fast, the tax revenue to GDP share has remained low: 13.3 per cent in 2015 and 11.2 per cent in 2019. This is lower than the target of an average of 15 per cent for 2010–2015 and 17.2 per cent for 2016–2020. An alternative strategy to increase tax compliance and revenue involves harnessing the civicmindedness of individuals, as well as social norms, reciprocity, and cultural values of trust. It is widely suggested that using social enforcement mechanisms to increase tax compliance is more effective than traditional tax enforcement tools like penalty. In Ethiopia, where there is a diversified business community characterised by unique cultural, moral and religious values, it is vital to exploit these social values to mobilise tax collection and improve compliance, presenting tax payment as a prosocial activity. Policymakers therefore need evidence on how social values, norms and individual behavioural differences can play a role in reducing tax evasion; however, no study has yet tried to evaluate the varying effects of such social values on the tax compliance of the business community in Ethiopia. This study investigates the correlation between the gender of business owners and the tax compliance behaviour of enterprises in Ethiopia, addressing the following questions: • Is there any difference in tax compliance between male and female-owned enterprises? • Does the gender composition of enterprise owners influence tax compliance? • Does the impact of the owners’ gender on tax compliance vary across firm size? |
| Keywords: | Economic Development, Finance, Gender, Governance, |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:15837&r= |
| By: | Adeniran, Adedeji; Ekeruche, Mma Amara; Onywkwena, Chukwuka |
| Abstract: | Economic development is linked with increased state capacity including the ability to mobilise domestic tax resources. For many developing countries, high levels of informality are a major constraint in this regard. Yet, economic incentives like changing the tax rate or increasing the filling and audit rate can be ineffective in a highly informal economic structure. In this paper, we explore possible roles for behavioural interventions such as sharing information about peers’ tax behaviour to engineer higher tax compliance. Based on an artefactual field experiment among own account workers in Nigeria, we find that information interventions can play an important role in ensuring tax compliance. Specifically, targeting information around what people can directly observe can be a way to improve tax compliance. Providing information on punishment or good practices that appeal to feelings of morality yields higher tax compliance. |
| Keywords: | Finance, Social Protection, |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:16711&r= |
| By: | Gallien, Max; Moore, Mick; van den Boogaard, Vanessa |
| Abstract: | This briefing explores the Covid-19 pandemic, which has raised twin challenges for public revenue around the world. Governments have undertaken huge expenses to finance medical responses and social protection programmes. At the same time, tax collection is decreasing as a consequence of both pandemic-related tax breaks and a dip in economic activity and trade. These challenges raise the risk of unsustainable public debt – especially for many low- and middle-income countries. As a consequence, policymakers are seeking new sources of revenue to bolster state budgets. In this context ‘taxing the informal economy’, or ‘broadening the tax net’, have become popular talking points. This brief explores why attempts to tax the informal economy typically result in only limited revenue, with the cost of collection often being higher than revenue raised |
| Keywords: | Finance, Governance, Health, |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:16574&r= |
| By: | Waiswa, Ronald; Akol, Doris; Nalukwago Isingoma, Milly |
| Abstract: | The rate of occurrence of tax evasion is higher in Uganda than in the rest of East Africa. Where the taxpayer has latitude to decide whether or not to be compliant, as in the case of income taxes, Ugandans seem to be less compliant than other East Africans. Uganda collects less in domestic taxes than other countries in the region. For revenue, the Ugandan government depends more on customs duties, on taxes that are difficult to dodge, notably Withholding Tax, and on taxes where there are in-built incentives to comply, such as Value Added Tax (VAT). The framework for improving tax compliance consists of three broad channels: making it easier for taxpayers to comply (facilitation), enforcement and increasing trust (in the government, in its spending practices, and in the tax collection agency itself). Using this framework, we discuss the measures that have been adopted by the Uganda Revenue Authority (URA) and the Government of Uganda, the successes achieved and the gaps that remain. The URA is best placed for facilitation. It also plays a major role in enforcement, although its efforts may be either supported or undermined by the government and politicians. The URA can do little to increase trust in the government in general; that is principally a job for the government. The URA can mainly make itself more trustworthy in the eyes of taxpayers by being transparent and minimising corruption. We find that URA has been successful in facilitating tax compliance, although there are opportunities for improvements on its current initiatives. The URA’s enforcement actions are, however, weak and limited. To a large extent, they have been undermined by the government and politicians. Enforcement has also been weak, due to internal URA factors, such as the understaffing of the enforcement team and the fact that the URA does not take enforcement action as often on small taxpayers. Lastly, very little has been done to build taxpayer morale. There are widespread concerns over the poor use of tax money, missing or poor government services and some sections of society being shielded from paying their share, because of their connections or roles in government. The URA is also not highly trusted and corruption is still a major problem among tax collectors. To build trust in the government, the URA is undertaking some of the tasks of justifying tax collection that would normally be undertaken by another part of government. There is a lot of scope for both the government and URA to gain more trust from the taxpayer. Improving tax compliance in Uganda will require the government (in the sense of the executive) and the URA to work more together. The government should give more support to URA activities, desist from protecting non-compliant taxpayers and be accountable to the public for the revenues collected. The URA needs to improve its trust-building initiatives and address some internal weaknesses. |
| Keywords: | Economic Development, Finance, Governance, |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:15555&r= |
| By: | Mascagni, Giulia; Santoro, Fabrizio; Mukama, Denis; Hakizimana, Napthal; Lees, Adrienne |
| Abstract: | Poor compliance is one of the key factors behind persistently low tax-to-GDP ratios in developing countries. Two dimensions of non-compliance that have been widely studied are under-reporting and non-filing (i.e. failing to submit a tax declaration altogether). However, there is a third and largely under-researched dimension of non-compliance: nil-filing. It refers to taxpayers who are registered and submit a tax declaration, but report essentially no information to the revenue authority (i.e. they report zero in all fields) and, as a result, generate no tax revenue. This behaviour is widespread in Rwanda: it concerned over half of all corporate income tax (CIT) returns and a quarter of personal income tax (PIT) returns in 2017. Despite being a well-known problem among tax administrators, there is no literature examining the cause of this apparently puzzling behaviour. If these businesses intend to evade taxation, then why register for taxes at all? Alternatively, if these businesses truly do not make any income, why do they continue to exist? This paper uses a mix of descriptive analysis of administrative data, a randomised control trial (RCT), and qualitative information collected through interviews with tax officials and taxpayers to shed light on the reasons behind this phenomenon. We argue that evasion is not a major part of the explanation for nil-filing. Rather, this behaviour appears to be driven by the interaction between aggressive taxpayer recruitment campaigns by the Rwanda Revenue Authority (RRA) and taxpayers’ responses to complexities in the tax system. To the best of our knowledge, this is the first study to document nil-filing behaviour in detail and to test the reasons behind it. |
| Keywords: | Economic Development, Finance, |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:15515&r= |
| By: | Rukundo, Solomon |
| Abstract: | Tax amnesties have taken centre stage as a compliance tool in recent years. The OECD estimates that since 2009 tax amnesties in 40 jurisdictions have resulted in the collection of an additional €102 billion in tax revenue. A number of African countries have introduced tax amnesties in the last decade, including Nigeria, Namibia, South Africa and Tanzania. Despite their global popularity, the efficacy of tax amnesties as a tax compliance tool remains in doubt. The revenue is often below expectations, and it probably could have been raised through effective use of regular enforcement measures. It is also argued that tax amnesties might incentivise non-compliance – taxpayers may engage in non-compliance in the hope of benefiting from an amnesty. This paper examines the administration of tax amnesties in various jurisdictions around the world, including the United States, Australia, Canada, Kenya and South Africa. The paper makes a cost-benefit analysis of these and other tax amnesties – and from this analysis develops a model tax amnesty, whose features maximise the benefits of a tax amnesty while minimising the potential costs. The model tax amnesty: (1) is permanent, (2) is available only to taxpayers who make a voluntary disclosure, (3) relieves taxpayers of penalties, interest and the risk of prosecution, but treats intentional and unintentional non-compliance differently, (4) has clear reporting requirements for taxpayers, and (5) is communicated clearly to attract non-compliant taxpayers without appearing unfair to the compliant ones. The paper then focuses on the Ugandan tax amnesty introduced in July 2019 – a Voluntary Disclosure Programme (VDP). As at 7 November 2020, this initiative had raised USh16.8 billion (US$6.2 million) against a projection of USh45 billion (US$16.6 million). The paper examines the legal regime and administration of this VDP, scoring it against the model tax amnesty. It notes that, while the Ugandan VDP partially matches up to the model tax amnesty, because it is permanent, restricted to taxpayers who make voluntary disclosure and relieves penalties and interest only, it still falls short due to a number of limitations. These include: (1) communication of the administration of the VDP through a public notice, instead of a practice note that is binding on the tax authority; (2) uncertainty regarding situations where a VDP application is made while the tax authority has been doing a secret investigation into the taxpayer’s affairs; (3) the absence of differentiated treatment between taxpayers involved in intentional non-compliance, and those whose non-compliance may be unintentional; (4) lack of clarity on how the VDP protects the taxpayer when non-compliance involves the breach of other non-tax statutes, such as those governing financial regulation; (5)absence of clear timelines in the administration of the VDP, which creates uncertainty;(6)failure to cater for voluntary disclosures with minor errors; (7) lack of clarity on VDP applications that result in a refund position for the applicant; and (8) lack of clarity on how often a VDP application can be made. The paper offers recommendations on how the Ugandan VDP can be aligned to match the model tax amnesty, in order to gain the most from this compliance tool. |
| Keywords: | Economic Development, Finance, Globalisation, |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:15883&r= |
| By: | Kangave, Jalia; Waiswa, Ronald; Sebaggala, Nathan |
| Abstract: | Most research on tax compliance, including research on gender differences in compliance, is based on one of two problematic sources of data. One is surveys enquiring about attitudes and beliefs about taxpaying, or actual taxpaying behaviour. The other is experiments in which people who may or may not have experience of paying different types of taxes are asked to act out roles as taxpayers in hypothetical situations. Much more accurate and reliable research is possible with access to ‘tax administrative data’, i.e. the records maintained by tax collection organisations. With tax administrative data, researchers have access to tax assessments and tax payments for specific (anonymised) individual or corporate taxpayers. Further, tax administrative data enables researchers to take account of a phenomenon largely ignored in more conventional compliance research. Tax payment is best understood not as an event, but as part of a multi-stage process of interaction between taxpayers and tax collectors. In particular, actually making a tax payment typically represents the culmination of a process that also involves: registering with the tax collecting organisation; filing annual tax returns; filing returns that indicate a payment liability; and receiving an assessment. The multi-stage character of this process raises questions about how we conceptualise and measure tax compliance. To what extent does ‘compliance’ refer to: registration, filing, accurate filing, or payment? The researchers employed this framework while using tax administrative data from the Uganda Revenue Authority to try to determine gender differences in compliance. The results are sensitive to the adoption of different definitions of compliance and subject to year-to-year changes. Finding robust answers to questions about gender differences in tax compliance is more challenging than the research literature indicates. |
| Keywords: | Economic Development, Finance, Gender, |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:16483&r= |
| By: | Santoro, Fabrizio; Groening, Edward; Mdluli, Winnie; Shongwe, Mbongeni |
| Abstract: | Non-filing of income tax takes place when taxpayers fail to submit a tax declaration, despite being liable to do so, thus becoming ghosts in the eyes of tax authorities. It is a widespread phenomenon in sub-Saharan Africa (SSA). Increasing evidence has been produced on non-filers in Rwanda, Uganda, Malawi, Kenya and Nigeria. Eswatini is no exception: over half (57 per cent) of personal income tax (PIT) returns are missing for 2013–2018; figures for corporate income tax (CIT) are lower (43 per cent), but still alarming. Non-filing has important negative repercussions in terms of fairness and equity, on top of undermining domestic revenue mobilisation. Hence, it is crucial for both researchers and tax authorities to understand what drives this phenomenon. Unfortunately, non-filing remains a neglected topic, with most tax literature focusing on positive filers. Here, we focus on non-filing of PIT, a progressive tax on income generated by non-incorporated traders, and consider two interrelated questions: (i) which economic and behavioural factors explain the decision to file a return in a given year? and (ii) do these factors differently impact the persistence of non-filing over time? A third crucial question naturally arises: are the same factors explaining self-reported compliance? Our theoretical approach builds on the behavioural formulations of the taxpayer decision. We consider six sets of drivers: (i) economic deterrence, (ii) compliance costs of filing, (iii) trust in the authority and political legitimacy, (iv) fiscal exchange or the reciprocity between taxes and public services, (v) social norms against tax evasion, and (vi) intrinsic motivation to comply. Summary of ICTD Working Paper 110 by Fabrizio Santoro,Edward Groening, Winnie Mdluli and Mbongeni Shongw |
| Keywords: | Economic Development, Finance, Governance, |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:15839&r= |
| By: | Moore, Mick |
| Abstract: | National tax administrations in sub-Saharan Africa have undergone considerable reform in recent decades. In a number of respects, they are, on average, more reformed and more efficient than tax administrations in other low income regions of the world. They have responded effectively to a number of major challenges. However, we now have evidence from benchmarking evaluations organised by the International Monetary Fund (IMF) that overall tax administration performance in the region is unimpressive. This paper assembles a wide range of evidence from recent research on two inter-connected policy issues in African tax administration: the use (under-use, misuse) of digital technologies and a set of questions of who should be taxing small scale business, how, and how much. The first conclusion is that digital technologies are generally under-used and mis-used relative to their potential. They tend to be deployed in a rather fragmented way and for ‘taxpayer facing’ activities, rather than for internal control purposes. They have much under-exploited potential to support additional revenue collection, to make the collection process less unpleasant and fairer and to address the problem of weak oversight and accountability of tax administrations. The second conclusion is that there is a high potential for improving the organisational arrangements for taxing small business in sub-Saharan Africa. The current practice reflects a confluence of several factors. For a number of reasons, tax administration is relatively centralised; nearly all revenues are collected by central government tax agencies, leaving very little for sub-national revenue collectors. In consequence, central government tax agencies have to organise themselves internally to undertake very different types of tasks: to collect revenue both from small numbers of big companies, that typically provide nearly all revenues, and from very large numbers of very small scale businesses. The latter collectively provide a small proportion of total revenue. Further, many if not most national tax administrations have on their books large proportions of inactive taxpayers – people and companies who are registered with the tax administration, but who do not actually pay tax. Taxpayer registers are often inaccurate. A major reason for both the large numbers of inactive taxpayers and the inaccuracy of the registers is that considerable efforts are continually made to register new taxpayers, even though experience indicates that few will actually end up paying tax. I label this the registration obsession. It is closely associated with the idea that the major source of uncollected revenues in sub-Saharan Africa is the so-called informal sector – implicitly, small scale businesses and relatively poor people. This narrative is diversionary. The major sources of uncollected revenues lie elsewhere, including the incomes and assets of the wealthy and the unjustified tax exemptions granted to companies. The informal sector narrative serves the purpose of distracting attention from these real sources of uncollected revenues. |
| Keywords: | Governance, |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:15661&r= |
| By: | Hamudi, Simbarashe |
| Abstract: | Value added tax is a key tax for generating revenue in Zimbabwe and all African states, and for financing the budget in African countries. VAT revenue has an essential role in budgetary policymaking. Every year revenue authorities are not collecting large amounts of VAT for various reasons, including ineffective administration and tax evasion. This brings the question of the reform of the VAT system to the forefront. In Zimbabwe, attempts to improve VAT revenue collection have been made over several years. Hopes were pinned on the use of fiscalisation and audits of VAT refunds.1 However, traders continue to evade VAT – and this has led to the introduction of value added withholding tax to improve VAT revenue collection. |
| Keywords: | Finance, |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:16729&r= |
| By: | Mascagni, Giulia; Molla, Kiflu; Mengistu, Andualem |
| Abstract: | This paper explores the relationship between tax rates and tax evasion in a low-income country context: Ethiopia. By using transaction-level administrative trade data, we are able to provide an analysis that is largely comparable with the rest of the literature while also introducing two important innovations. First, we compare the elasticity of evasion to statutory tax rates and effective tax rates (ETRs). Most studies in the literature so far focused on the former. We show that ETRs are the most relevant parameter to explain evasion in contexts where exemptions are widespread, which results in a large divergence between ETRs and the statutory rates set out in the law. Second, we account for trade costs more precisely than the previous literature by adjusting the trade gap rather than controlling for proxies. We argue that this new approach to accounting for trade costs is superior to those previously adopted in the literature. |
| Keywords: | Finance, |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:16548&r= |
| By: | A. BAUER (Insee); - M. ROTEMBERG (New York University) |
| Abstract: | Corporate tax codes can have notches; values where after-tax profits decrease in before-tax sales. Firms endogenously respond to notches, leading to excess mass in the firm-size distribution. We study a 1997 policy reform in which the French government implemented a transient tax reform that increased profit taxes by 15% for firms with over 50 million Francs in turnover. We use two distinct and complementary approaches to estimate the extent of tax avoidance: (a) using firms far away from (and therefore unlikely to be responsive to) the tax notch in the same year and (b) the entire firm size distribution before the tax reform. Both strategies generate similar results for the extent of tax avoidance. We show that the firms who avoid the tax are the ones with the lowest calibrated adjustment costs and those with the larger profits. The tax avoidance behavior comes mostly from increases in inventories and decreases in sales. |
| Keywords: | Business Taxes, Tax Evasion, Firm Production |
| JEL: | H25 H26 H32 D24 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:nse:doctra:g2020-10&r= |
| By: | Johannes Becker; John D. Wilson |
| Abstract: | We consider a world in which countries apply optimal taxes on mobile capital and savings (like in Bucovetsky and Wilson, 1991). Firms and savers may underreport income in order to avoid or evade taxation. We show that, even in the presence of underreporting, the equilibrium under tax competition may still be constrained-efficient (in the sense that there is no scope for welfare enhancing tax coordination). This is the case if the marginal social costs of underreporting savings and investment income are equal. The model demonstrates that, if source-based taxes on capital are inefficiently low, as is often assumed, taxes on savings must be inefficiently high. Constrained-efficient tax policy minimizes the social cost of underreporting. The results are robust to introducing taxes on profit or on labor income, if these types of income can be underreported as well. We conclude that commonly held assumptions on the need for coordination under tax competition need to be revised or qualified. |
| Keywords: | tax competition, social welfare, tax coordination |
| JEL: | H25 H32 H87 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9318&r= |