Tax, Time, and Targets: How Much Domestic Resources Can Lower-Income Countries Raise?
with Max Gallien and Giulia Mascagni
As Overseas Development Aid decreases, additional pressure is shifting onto lower-income countries’ ability to mobilise domestic resources through taxation. This raises critical questions about how much and how quickly lower-income countries can raise their tax takes – and what the consequences of this pressure are. We explore both questions through an analysis of tax targets. We find that in most contexts, there exist a multiplicity of targets, fulfilling different functions. Historical performance suggests that many targets, especially those not explicitly rooted in budget documents, are overly ambitious, and are unlikely to be achieved. Crucially, we highlight that overly ambitious targets can have concrete negative consequences for both the equity and efficiency of tax policy and administration, implying concrete recommendations for both domestic and international stakeholders.
Is a Tax Just Another Price? Market Responses to Mobile Money Price Shocks
with Samuel Musoke, Jimmy Apaa, and Milly Nalukwago (Bank of Uganda)
The introduction of a new tax on mobile money transactions in 2018 led to widespread public protest, a sharp decline in aggregate transaction activity, and the eventual redesign of the tax. Two years later, during the COVID-19 pandemic, Uganda's mobile money service providers temporarily waived fees on mobile money transfers, before rapidly re-instating fees a few months later. These two events created unanticipated, salient shocks to the mobile money market. Using transaction-level administrative data, and a regression-discontinuity-in-time model, we propose to examine the sensitivity of mobile money users to pricing shifts.
The Economic Impact of the Pandemic in Rwanda: An Analysis of Firm-Level VAT Data
with Giulia Mascagni | April 2022 | Journal of African Economies (ungated)
Top 5 most viewed article online in the Journal of African Economies 2023
There are substantial differences in the spread of the covid-19 pandemic and policy responses to it between high- and low-income countries. While evidence on the former is growing, there remain more unanswered questions on the latter. This paper addresses this gap by providing insights on the impact of the pandemic in Rwanda, based on firm-level administrative data from Value Added Tax (VAT) returns. We find that VAT sales in 2020 declined by 11.4 % compared to 2019. These losses are particularly associated with a lockdown imposed around April 2020, after which sales quickly rebounded to pre-crisis levels once restrictions were lifted. In absolute terms, the economic cost is concentrated among the largest firms. However, small firms have been most affected in proportional terms. Disaggregating our results further, we show that firms in accommodation and food, transport services, wholesale and retail trade, as well as those registered in the capital, have been particularly affected by the crisis. Overall, the decline in sales translated to a similarly large percentage loss in VAT revenue for the government.
The Panopticon Taxman: The Impact of E-invoicing on VAT compliance in Uganda
with Maria Jouste (UNU-WIDER), Nicholas Musoke (URA), and Joseph Okello (URA)
The digitalisation of tax administration promises improved efficiency and increased tax revenues. In recent years, the real-time information trail of the Value-Added Tax (VAT) has been digitalised in many developing countries. We evaluate the impact of introducing an e-invoicing system in Uganda using administrative tax data in a synthetic difference-in-differences framework. To identify the effects on firms' reporting behaviour, we exploit a policy change that exposed a subset of VAT-registered firms to stricter enforcement of the e-invoicing mandate. We find that treated firms reduce their reported purchases by 43 percent and increase their reported VAT liabilities by nearly 150 percent. However, we also find that firms reduce reported sales by 43 percent, indicating that since firms are no longer able to exaggerate input VAT claims, they respond by suppressing sales to manage their VAT liabilities. On the extensive margin, we show that the introduction of e-invoicing has coincided with an acceleration in the number of taxpayers filing VAT declarations monthly, many of whom previously filed Corporate Income Tax returns. This indicates that e-invoicing has brought new VAT-payers into the tax net.
Beyond the Tax Bill: Measuring Tax Compliance Costs for Ugandan Firms
May 2025 | ICTD Working Paper
For low-income countries looking to enhance revenue mobilisation without harming firm growth, understanding the full burden of taxation, beyond just tax liabilities, is crucial. This paper documents the substantial and often regressive tax compliance costs faced by small and medium-sized firms in Uganda. Using original survey data from nearly 2,000 taxpaying firms across Uganda, matched to administrative tax returns data, I show that compliance costs are significant, equivalent to two percent of turnover for the median firm, with smaller firms bearing a disproportionate burden. Moreover, total compliance costs often exceed firms' tax liabilities. Breaking down cost components, I find that labour time spent on tax compliance activities is the largest component, with tax compliance consuming a median of 34 hours of labour time per month, and approximately 20 percent of firm owners' working hours. I show that the majority of firms outsource at least part of their tax obligations to a tax agent, often to compensate for limited tax knowledge. These agents are relatively expensive, costing a median of USD 54 per month. Adopting compliance technologies does not significantly reduce reported compliance costs or time, although firms perceive that technology makes compliance easier. Finally, I use a survey experiment to test how sensitive compliance costs measures are to the measurement strategy, finding significant divergence between estimates obtained through a detailed set of questions and a more aggregate question. Discrepancies between estimates are reduced when respondents are primed with the detailed set of questions first, suggesting that simple aggregate questions might not capture compliance costs in a consistent manner.
Research within Tax Administration: From Monitoring Revenue to Influencing Policy
with Giulia Mascagni | July 2024 | ICTD Working Paper
This paper discusses the role played by research departments within tax administration, drawing on the experiences of officials from eight African revenue authorities. While high quality research is important for evidence-based policymaking, it is often overlooked. We explore several key challenges faced by researchers within tax administration, including staff capacity, data quality, access and coverage, and obtaining high-level support and policy impact. We also document solutions and success stories based on the experience of these eight revenue authorities, where scarce resources have been focused to maximise the benefits of research and administrative data. Finally, we develop a toolkit of options to enhance research capacity and its strategic role to guide reform.
Technology and Tax: Adoption and Impacts of e-Services in Rwanda
with Fabrizio Santoro, Marco Carreras, Theonille Mukamana, Naphtal Hakizimana and Yves Nsengiyumva | January 2023 | ICTD Working Paper
Many low-income countries are increasingly digitising various tax services, usually motivated by efforts to increase efficiency and transparency and reduce the burden of compliance for taxpayers. However, where awareness and adoption are suboptimal, tax e services may produce only partial benefits. In this paper, we examine the adoption of tax e-services in Rwanda, a low-income country which has invested significant resources in digitalising government service delivery and made tax e-services mandatory from 2015. Using a combination of panel survey and tax administrative data, we study the drivers and impacts of e-services awareness and adoption. We find evidence that, before the pandemic, female and less educated taxpayers, with less sophisticated businesses, were left behind in technology adoption, even where e-services were the only option for taxpayers. Exploiting the outbreak of COVID-19 during our data collection, we also study shifts precipitated by a shock that normalised digital transactions. Take-up of e-services is remarkable two years after the pandemic, but still not universal. For those not using the e services the same challenges in access persist – indicating the potential for more targeted policy interventions. Interestingly, technology adoption is not strongly related with filing behaviour, and we study the reasons why non-filers report using the tools and, on the contrary, why active filers report they do not. Also, we do not find any significant impact of e-services adoption on perceived fairness of the tax system and overall willingness to pay, which we hypothesised benefit from e-services. Finally, using evidence from qualitative interviews, we highlight practical challenges in using e-services, such as connectivity problems and slow systems, which undermine the potential benefits.
Enablers, Barriers and Impacts of Digital Financial Services: Insights from an Evidence Gap Map
with Philip Mader, Maren Duvendack, Keir Macdonald, and Aurelie Larquemin | June 2022 | ICTD Working Paper
Digital financial services (DFS) have expanded rapidly over the last decade, particularly in sub-Saharan Africa. They have been accompanied by claims that they can alleviate poverty, empower women, help businesses grow, and improve macroeconomic outcomes and government effectiveness. As they have become more widespread, some controversy has arisen as governments have identified DFS revenues and profits as potential sources of tax revenue. Evidence-based policy in relation to taxing DFS requires an understanding of the enablers and barriers (preconditions) of DFS, as well as the impacts of DFS. This report aims to present insights from an Evidence Gap Map (EGM) on the enablers and barriers, and subsequent impacts, of DFS, including any research related to taxation. An EGM serves to clearly identify the gaps in the evidence base in a visually intuitive way, allowing researchers to address these gaps. This can help to shape future research agendas.
Interactive Evidence Gap Maps are available here.
There and Back Again: The Making of Uganda's Mobile Money Tax
with Doris Akol | July 2021 | ICTD Working Paper
This paper evaluates the appropriateness of the tax policymaking process that led to the introduction, and the later adaptation, of a tax on mobile money transactions in Uganda in 2018. We examine the unusual source of the proposal, how this particular tax diverged from the usual tax policymaking process, and whether certain key stakeholders were excluded. We argue that weaknesses in the tax policymaking process undermined the quality of policy design, and resulted in a period of costly, and avoidable, policy adjustment. This case study is relevant for Uganda as well as for other low-income countries which could be exposed to similar challenges in designing effective taxes for the mobile money industry.
Two-page Research in Brief available here.
Using Administrative Data to Estimate the Impact of Covid-19 on Firms and Tax Revenue in Africa
with Giulia Mascagni, Anne Brockmeyer, Pierre Bachas and Camille Semelet | August 2020 | World Bank MTI Practice Notes
These notes use administrative tax data for firms to measure the direct impact of lockdown restrictions on firms’ profitability, employment, and exit rates. We separate the economy into three sectors, which face different size shocks, and consider two lockdown scenarios: one lasting three months and one lasting five months. We estimate losses to corporate income tax (CIT) revenue, increases in firms’ debt levels, cuts in employment and their mitigation through wage subsidies, and aggregate output losses from firms’ exit.
Country notes for Rwanda, Eswatini, and South Africa
2019 | Pathways for Prosperity Commission Background Paper, University of Oxford
Emerging technologies, including robotics and additive manufacturing, are changing the nature of manufacturing processes and employment. This has given rise to fears that manufacturing jobs will be increasingly reshored, causing premature deindustrialisation in developing countries. This paper reviews the debate on technology and reshoring and argues that fears are overblown, based on imperfect methodologies, and do not adequately consider social and political factors affecting production. Indeed, it seems likely that automation will not dramatically alter global value chains in the short term, allowing developing countries to pursue manufacturing-led growth, particularly in industries where adoption of technology has been slow. However, while the immediate risk may be low, it will become increasingly important for developing countries to “future-proof” their populations through education and skills development. Furthermore, developing countries should consider promoting alternative paths to development, including export-oriented services and bolstering domestic trade.
Understanding and characterizing the services sector in South Africa
with Haroon Bhorat, Francois Steenkamp, Christopher Rooney, and Nomsa Kachingwe | 2016 | WIDER Working Paper
The South African services sector is large and growing. This coupled with declining employment shares in manufacturing and mining (i.e. deindustrialization) suggests that South Africa is a de facto service-orientated economy. Employment patterns in services reveal a segmentation that is characterized by high-productivity, high-wage services, low-productivity, low-wage services, and government services. There has been sustained growth in services exports in the post-1994 period but the composition is biased toward traditional services. Increased entry into developing country markets is characterized by increasingly sophisticated services. A key driver of export growth is the expansion of foreign direct investment into developed country markets, and increasingly, into developing country markets, particularly African markets.
Published in Industries without Smokestacks, edited by Richard Newfarmer, Finn Tarp, and John Page