Abstracts Title: Aid and Taxation: Evidence from Ethiopia Author: Giulia Mascagni Abstract: The relation between aid and tax has been largely debated in the literature, given its far-reaching consequences: the presence of a crowding-out effect of aid on domestic revenue would seriously impair the sustainability of the development process. This paper explores this relation by adopting a case-study approach, which overcomes some of the common limits of the cross-country literature. I use time series data for Ethiopia for 1960-2009, a longer time series than most country studies of this kind. The estimation is based on an error correction model that allows separating long-run equilibrium relations and short-run dynamics. The analysis shows that both foreign grants and loans have a positive relation with tax revenue in Ethiopia. This effect seems to be robust to endogeneity and to structural breaks, although clearly establishing causality remains a challenge. The results show that aid has a beneficial effect on tax revenue, which may be due to its role in supporting fiscal reforms and improvements in tax administration. Key words: Foreign Aid, Taxation, Grants, Loans, Ethiopia JEL classification: F35, O23 Title: Information Technology and Fiscal Capacity in a Developing Country: Evidence from Ethiopia Authors: Merima Ali, Abdulaziz Shifa, Abebe Shimeles and Firew Woldeyes Abstract: Governments in developing countries are typically constrained by a limited fiscal capacity tofinance the provision of essential public goods a constraint that has been cited as one ofthe fundamental challenges to economic development. Several developing countries haverecently implemented electronic tax systems (ETS) to improve monitoring tax complianceusing modern information technology (such as electronic sales registry machines (ESRMs)).Despite the widespread adoption of ETS throughout the developing world, there is a dearthof systematic evidence on its impact. In this paper, we document the impact of ETS usingquasi-experimental evidence from Ethiopia a low-income country in Sub-Saharan Africa, which expanded use of ESRMs in recent years. We use administrative data covering theentire set of those registered for Value Added Tax (VAT) in Ethiopia. We find that ETSresulted in a large and significant increase in VAT payments (of about 20 log points). Wealso find evidence that the effect is driven primarily by firms that are more likely to evade taxes prior to ETS adoption suggesting that ETS has minimized tax evasion. Keywords: taxation; fiscal capacity; information technology; developing economy.
Title: Deterrence versus Persuasion: Tax Compliance in Addis Ababa Authors: Abebe Shimeles and Firew Woldeyes, Daniel Gurara Abstract: Tax payers are faced with uncertainty when deciding on tax declaration on whether to declare the actual amount or declare less than the actual amount which will make them better off if they are not investigated. There is a debate about the effectiveness of threats versus persuasion for improving tax compliance among tax payers. In this paper, we examine the effectiveness of threats of punishment versus the power of persuasion to increase tax compliance among businesses located in Addis Ababa. We have approached 2800 randomly chosen businesses to submit letters approximately a month in advance before declaring profit taxes. Half the letters carry information about the consequence of not submitting the correct documentation on the right time and half the letters carry information about the importance of submitting the correct tax documentation on time without making any reference to the consequences of not doing so.
Title: Distribution of Effective Tax Burden Across firms in Ethiopia Authors: Giulia Mascagni, Andualem Mengistu Abstract: The tax burden of firms influences their investment pattern and other decisions. This burden can be captured by Effective Tax Rates (ETR) that are broadly defined as the amount of tax that firms pay out of their income. While a high tax burden may be an obstacle to development in the private sector, governments need to ensure a steady stream of tax revenues but may experience difficulties in collecting them from companies. As such it the ETR is an important variable to analyze. However, not many studies are done in this regard in the African context and those that are done rely on statutory tax rates rather than effective ones, which capture what is actually paid by firms. This is mostly due to lack of appropriate data as a result of shallow or nonexistent stock market listing of firms, amongst others. In this paper we use anonymous administrative data from the Ethiopian Revenue and Customs Authority (ERCA) to calculate ETRs. This is a unique firm level dataset from tax returns covering eight years and with a total of over 150,00 observations. This data set has a couple of advantages over what is used in the literature. First, it is better than estimates obtained with a legal approach using tax laws and regulations because it reflects what firms actually pay, rather than what they should pay in principle. Second, it is better than data from listed firms, which is typically used in the corporate ETR literature, since only a handful of firms are listed in Africa. Based on this data we perform two sets of analysis. First, we provide a descriptive analysis that sheds light on the distribution of firms across size, geography, and across sectors; the number of firms that report losses, as well as the tax take and ETR in each category. Second, we use panel data econometrics to analyze the factors that determine the difference in terms of ETRs across Ethiopian firms. Specifically, we estimated the impact of age, size, sector, and export status of firms on their ETRs. Key Words: Effective Tax, GTP, Ethiopia JEL classification: H25, E62
Title: Tax compliance costs in developing countries: Evidence from Ethiopia Authors: Wollela Abehodie Yesegat, Jacqueline Coolidge, Laurent Olivier Corthay Abstract This paper examines tax compliance costs in Ethiopia. It focuses on assessing the magnitude and nature of tax compliance costs and identifying areas in the design and administration of taxes that contribute to tax compliance costs. The study uses IFC/World Bank s tax compliance costs and perception survey data. The survey covered 1003 formal businesses selected using stratified random sampling in Addis Ababa and four major cities of the four largest regional states in Ethiopia (Adama, Bahir Dar, Hawassa and Mekelle cities). The survey was administered in a face to face interview mode. The study analyses the data elicited from the survey; it also examines all the relevant documents and statistics held by the Ethiopian Revenue and Customs Authority, Ministry of Finance and Economic Development and other institutions. The results of study reveal that tax compliance costs in Ethiopia in the fiscal year 2011/12 were relatively high. The total costs of tax compliance is estimated to be in the range of Ethiopian Birr (ETB) 5.8 billion (about USD 309.5 million 1 ) and ETB 7.5 billion (USD 400.5) representing about 4.5 percent and 1 percent of tax revenue collection and Gross Domestic Product (GDP) respectively in the year under consideration. In terms of burden of tax compliance costs in relation to business size, relatively smaller businesses are bearing disproportionately higher burden of tax compliance costs evidencing the regressivity of tax compliance costs in Ethiopia. Taxpayers with annual turnover less than ETB 100,000 were found to bear compliance costs of about 5% of their turnover which is like an additional turnover tax of 5%. In addition to the burden, the regressiveness of tax compliance costs is likely to impact on the equity of the tax system as a whole as this is likely to exacerbate the unfairness of the entire tax system. International comparison of tax compliance costs also shows that the tax compliance cost to turnover ratio is higher for smaller businesses in Ethiopia than that in Kenya and Nepal. Of the different types of taxes covered in the study, business profit tax, VAT and turnover taxes (ToT) absorbed the largest share of tax compliance costs in Ethiopia. This picture might be due to the fact that business profit tax has complexities especially in relation to the tax regime for relatively smaller businesses. With respect to VAT and the ToT, the compliance costs might be associated with the frequency of reporting. In terms of compliance costs by type of compliance activity pre-filing and filing activities absorbed the largest share of staff time spent in tax compliance process. To reduce the burden of tax compliance costs, simplifying the tax regime for smaller businesses, reducing the frequency of VAT filing for relatively smaller businesses, revisiting 1 Assuming average exchange rate for the fiscal year 2012/13, USD 1 = ETB 18.59
VAT sector selected registration requirements were suggested to be worth considering. Especially, reviewing VAT sector selected registration requirement is important in reducing the burden of tax compliance on taxpayers operating in regional states as the volume of business in regions is likely to be less and is likely to defeat the assumption that taxpayers in those selected sectors can have annual turnover of at least ETB 500,000. It is also important to consider using modern technology in simplifying the tax-filing and payment procedures like electronic taxation system (expanding its coverage and also supporting it with electronic payment) and mobile declaration and payment for relatively smaller businesses. As the practice of using external tax accounting services is increasing, it is important to improve the quality of tax advisory services through proper regulation of the sector. Title: Over-taxation or tax-evasion? Authors: Abdulaziz Shifa, Merima Ali Abstract: Using a large scale administrative data on several types of taxes paid bybusinesses in Ethiopia, a country that has expanded the use of electronicsales register machines (ESRMs) in recent years, we study the types of taxes for which the use of ESRMs improved compliance. Moreover, ESRMs are expected to minimize noise in the revenue filings by business owners. Thus, we study how the effect of ESRM varies across firms due to this particular mechanism of more accurate information on firms' revenue. Title: The Distributional Impact of Fiscal Policy in Ethiopia Authors: Tassew Woldehanna, Eyasu Tsehaye, Ruth Hill Abstract: The study analyses the incidence of fiscal policy in Ethiopia using the Commitment to Equity methodology (Lusting and Giggins, 2013). The study has analyzed the distributional impact of 83% of the 43% of government spending. The analysis shows that the Government of Ethiopia has reduced inequality and poverty through fiscal policy. In general public spending in Ethiopia is progressive. In many cases spending is also pro-poor, providing more to poorer households. The impact of the direct transfers provided in the Productive Safety Net Program (PSNP) in reducing inequality and poverty is particularly significant. Spending on primary health care and education is pro-poor, but becomes less progressive for secondary and tertiary education. Spending on services that are well accessed by poor households such as primary education and preventive health care is pro-poor. However spending is less progressive on programs where challenges remain in ensuring utilization by poorer households such as enrollment in secondary and tertiary education or use of curative health services. Expenditure on subsidies which are meant to benefit the poor is generally less progressive and is not generally pro-poor. The largest indirect subsidy is
on electricity consumption which is particularly regressive because access is limited among poorer households. Direct and indirect taxes are pro-poor and progressive, with high income groups generally paying a larger proportion of their income than low income groups. Most of the tax incidence on households comes from indirect taxes which are slightly less progressive than direct taxes. However the progressivity of indirect taxes in Ethiopia is much higher than in other countries on account of the exemptions on goods that form a larger share of the consumption of poorer households. For most poor households, the transfers and benefits received are higher than the amount paid in taxes. As a result, fiscal policy brings about poverty reduction.