Taxation in Africa Anders Jensen (HKS) LIEP – April 30 th - PowerPoint Presentation

Taxation in AfricaAnders Jensen (HKS)LIEP – April 30th 1

Present different projects related to taxation in AfricaAll of them (very much) work in progress: appreciate all comments and feedback!ROADMAP2

Taxation in the long-run: new facts across space and time Taxation and technology: evidence from GhanaROADMAP3

Taxation in the long-run: new facts across space and time Taxation and technology: evidence from GhanaROADMAP4

Joint work with Pierre Bachas (WB) and Gabriel Zucman (UC Berkeley)Construct panel data-set covering 100 countries over 60 years between 1955 and 2015Detailed information on sources of tax revenue and social security contributionsDetailed information on national accounts Span and granularity allows us to overcome limitations of current (tax revenue) databasesLimited time-series in developing countries: meaningfully begins early/mid 1990sLimited disaggregation of sources : per example, PIT versus CIT under ‘Income ’ Non-existent d istinction between national and sub-national Exclusion of important sources: social security, direct taxes on capital I – NEW FACTS ACROSS SPACE AND TIME 5

First research question: Long-run trends in the effective tax burdens on capital, labor, and consumptionConceptual motivation: Distribution of tax burden among national income components and the ‘determinants’ of that allocation are importantInform impact of (aggregate) taxation on major macroeconomic variables, including investment and employmentChanges in relative burdens over time affect income inequality across householdsGuide tax policy design: association with changes in underlying factor sharesEmpirical motivation: Statutory (marginal) rates can bear little relation to actual taxes paidIn many macro models, effective (average) tax burden is conceptually correct metric Relate realized tax revenues directly to macroeconomic variable: Lucas (1991), Mendoza (1994) Construct average effective tax rate of labor, capital, and consumption in the National Accounts Follow OECD methodology (2015 ) Adjust to developing country context: Micro-data in selected developing countries to help assess magnitude of potential bias derived from aggregate data I – EFFECTIVE TAX RATES ON CAPITAL VERSUS LABOR 6

Least developed countries High developed countriesI – EFFECTIVE TAX RATES ON CAPITAL VERSUS LABOR7

Second research question: Tax ‘accelerations’ in developing countries‘Stylized’ facts based on cross-country and within-developed countries over time at odds with SSA within-country over timeLarge heterogeneity across SSA countries (South Africa, Kenya, Tanzania, Ethiopia)Set of policy-revenant Qs How likely are developing countries to undergo sustained acceleration of tax collection?Which revenue bases, if any, are most likely to see sustained accelerations?What factors are associated with such transitions? Analysis requires long-time series, while important potential factors predate pre-existing databases Changes to structure of government (e.g. independence) Openness (e.g. WTO membership) Tax reforms (e.g. VAT introduction)Economic reforms and crises Growth-analogue : Hausman, Pritchett, and Rodrik (2005) I – TAX ‘ACCELERATIONS’ 8

‘Stylized fact’: long-run positive growth in tax collection (relative to GDP)Holds in South AfricaInstead: acceleration followed by long stagnationKenyaInstead: acceleration(s) followed by erosion, lead to current non-recoveryTanzania, Ethiopia‘Stylized fact’: gradual shift in composition away from ‘traditional’ taxes (trade) towards ‘modern’ taxes (income)Holds in South AfricaInstead: prevalence of ‘modern taxes’ even in early periodsKenyaInstead: no long shift from ‘traditional’ to ‘modern’Tanzania, Ethiopia I – NEW FACTS IN SELECTED SSA COUNTRIES 9

I – KENYA: 1960-201010

I – SOUTH AFRICA: 1960-201011

I – TANZANIA: 1960-201012

I – ETHIOPIA: 1960-201013

Taxation in the long-run: new facts across space and time Taxation and technology: evidence from GhanaROADMAP14

Joint work with James Dzansi, Henry Telli (University of Ghana, East Legon), and David Lagakos (UC San Diego)Joint policy-research collaboration with Ministry of Finance and Ministry of Local Government in GhanaIII – TAXATION AND TECHNOLOGY15

Limited observability is key constraint to tax collection in developing countriesWedge between (well intended) statutory policies and effectively implemented policiesIncrease in discretionary power of intermediaries (e.g. local tax collectors in the field)Costly and inefficient collection processState investments in technology can potentially alleviate observability constraintsRecent theoretical work (Besley and Persson, 2009, 2010)Limited empirical evidence on returns to investments in tax capacityInvestment is associated with large impacts (case-studies)But decision to invest, and implementation conditional on investing, may be driven by underlying revenue trends and/or correlated with determinants of revenue collection Well-identified evidence from other technology investments in state capacity find high returns, including Delivery of anti-poverty programs in India: Muralidharan [2016 ] Voting technology in Brazil: Fujiwara [2015] Electroni c procurement in India and Indonesia: Lewis- Faupel , Olken, Neggers , Pande [2016] III – TAXATION AND TECHNOLOGY 16

In this project, we present evidence from a large-scale experimental evaluation of the technology on property taxes in GhanaRandomize roll-out across 98 districts, covering 18 million peopleRandomization at full organizational scale of local governmentsProject is part of on-going collaboration with central and local government agencies to improve local tax collection performanceConsensus (supported by data) that exists strong potential for improvementIterative process: (long) list of potential determinants, uncertain returns to eachContext: low adoption of tax-enhancing technologiesPre-existing technology developed around 2013 in collaboration with foreign aid agency, proposed by Ministry of Local Government Reasons for non-adoption (baseline survey) Did not know about technology Technology inadequate for district-specific setting III – TAXATION AND TECHNOLOGY IN GHANA’S LOCAL GOVERNMENT 17

Limited observability is ubiquitous feature of property taxation in SSAImproved IT systems often hailed as a “potentially transformative tool” (APTI, 2017) IT reforms under way in Ethiopia, Nigeria, Senegal, Sierra Leone Recently developed technology by Ghanaian private firmGIS-based system dramatically lowers cost of building and maintaining property registry‘Locally appropriate’ billing, payment, and enforcement software using GIS-system as automated data inputReal-time monitoring of tax collectors, and (third-party) customer service Baseline survey suggests that this locally developed technology could plausibly improve local tax collection 15 % of districts have ‘any’ form of technology B ut adoption of technology is associated with 50% increase in revenue Cost of collection is 49 % (lower bound)Compared to 0.45% in US (IRS, 2010) 35% of properties receive official tax bill, with a recovery rate of 63% ‘High’ recovery rates consistent with Pakistani setting: Khan, Khwaja, Olken [2015] III – REASONS TO BE OPTIMISTIC 18

Implementation requires solving a complex mix of technical and logistical challenges (Andrews, Pritchett, Woolcock, 2017)Undertaking may fail unless all components are well-implemented (Kremer, 1993)Vested interests whose rents are threatened may subvert the intervention and limit its effectivenessIndividual tax collectors and/or central administratorsDampen incentives to collect taxes in first place, and thus reduce levels of local public goodsEven if aggregate revenue collection impact is positive, uncertainty aboutOverall cost-effectiveness (actual and as perceived by local decision-makers)Distributional consequences III – REASONS TO BE SKEPTICAL 19

Limited evidence to support either enthusiasts or skeptics of investments in technology to alleviate tax observability and collection constraintsAim to fill this gap in a large-scale experimental evaluation of newly developed technology for local governments in GhanaRandomize the order in which 98 local governments are offered technology by private firmUp to date, GIS-based property registryLocally tailored revenue software for billing, payment, enforcement, using GIS input Evaluation50 treatment districts, 48 control districts 18-24 months evaluation periodIntervention design‘Conference event’: overcome information barrier Follow-up ‘showcase’ events in treated districts: involve large number of authorities III – RESEARCH DESIGN 20

III – BALANCE21

Net tax revenue performance H1: Intervention increases coverage rate and recovery rate Data: monthly administrative data and end-line survey H2: Intervention reduces cost of collection (at least ‘head-quarter ’ resources) Data : yearly administrative data and end-line survey Given baseline values, suppose 25% improvement in coverage rate, recovery rate, cost Would lead to 98% increase in net tax revenue collected Leakage (imperfect proxies ) H4: Intervention reduces ‘head-quarter’ leakage (“double books”) H5: Intervention reduces ‘in the field’ leakage (reduced collector bargaining power?) Data: yearly Auditor General data and combined end-line with administrative data Tax revenue ‘production function’ Technology and labor complements vs substitutes in the revenue production function? H6: Intervention leads to change in number of field collectors Data: yearly administrative data and end-line survey   III – DIMENSIONS OF ANALYSIS 22

Household preferencesH6: perceived ‘state capacity’ improvement leads to higher reported satisfaction and engagement with local governmentH7: increased accountability from capacity-driven additional fundingStronger alignment of expenditure with citizens’ listed preference over expendituresData: end-line surveyLeadership preferences (legislative, executive, bureaucratic)H8: change in time-horizon and aversion to taxData: end-line survey III – DIMENSIONS OF ANALYSIS 23

To date, no experimental evaluation of investment in tax capacityInternal validity (+)Evaluate implementation by local government at full-scaleAnd, heterogeneity in pre-existing administrative capacity and economic structure External validity (+)Constraints tackled by our specific technology are ubiquitous across SSAPolicy-relevance (+)III – RESEARCH DESIGN: UPSIDE 24

Will not be able to experimentally investigate barriers to adoption of technologyNon-adoption at baseline and imperfect take-up of proposed technologyProvide suggestive evidence based on rich heterogeneity analysisIntervention is bundle of ‘sub-interventions’Plausible that all sub-components are required for successful implementation Can only provide non-experimental decomposition of treatment effects (Muralidharan et al., 2016)III – RESEARCH DESIGN: DOWNSIDE 25

Intervention in May 2018We are planning for failure Monitor take-upElicit feedback in first months of engagement with TG districtsAt the moment, end-line aimed for January 2019III – TIMELINE26

Thank you for your comments!anders_jensen@hks.Harvard.eduRubenstein 328 27