FERDI, ICTD, CERDI Jeudi et vendredi 12 - 13 juin 2014, Clermont-Ferrand, France.

1. La mesure de la performance dans les administrations fiscales et douanières des pays en développement FERDI, ICTD, CERDI Jeudi et vendredi 12 - 13 juin 2014, Clermont-Ferrand, France. The power to tax in Africa: VAT, LTU, and SARA Christian Ebeke, Mario Mansour and Gregoire Rota Graziosi International Monetary Fund CERDI and FERDI. This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

2. Introduction • The power to tax is a core function of the state. • Preponderant role of taxation in the relationship between rulers and citizens (Ardant, 1971, Friedman, 1974, and Tilly, 1990). • State building => governments’ ability to raise taxes (Brautigan et al., 2008; and Besley and Persson, 2011). • Three major reforms in tax policy and tax administration in Sub-Saharan Africa (SSA): • Large Taxpayer Units (LTUs): a rationalization of the tax administration through the segmentation of taxpayers according to their turnover; • Value Added Tax (VAT): a partial delegation of revenue collection to the private sector (self-enforcing mechanismthough the credit-invoice method); • and Semi-Autonomous Revenue Authorities (SARAs): a strategic delegation of tax collection to an agent. • A common denominator of these reforms: increase revenue through better enforcement of tax laws.

3. Introduction • Our analysis: estimating the effectiveness of these three tax reforms on domestic revenue mobilization. • Our database:tax revenue from non-renewable natural resources to GDP ratio for 41 SSA countries over 1980-2010 (Mansour, 2014). • Our empirical analysis: a wide range of complementing empirical approaches to address the issue of self-selection associated with the decision to adopt each reform. • Fixed-effects estimates • Dynamic panel estimates with fixed-effects. • the propensity score matching, • and the synthetic control method. • Our results: • VAT and SARAs improve significantly tax revenue mobilization; • the impact of LTU is debatable.

4. LTU: strengths and weaknesses • Initially in Latin America in the late 70s, • Establishing a self-contained office within the tax administration, acting as single clearance window for large taxpayers for the main domestic taxes: income taxes, VAT… • Strengths: • Segmentation => the specialization of the personnel of the tax administration, • Centralization of core functions for all taxes, • An opportunity to induce other efficiency-improving reforms such as self-assessment, adoption of unique taxpayer identification numbers, electronic filling, and new computerized information system (Baer, 2002; and McCarten, 2005) • Weaknesses: • Concentration of the tax administration efforts and most competent human resources to a small number of large taxpayers => the emergence of a dual economy • Risk of unbalanced resource allocation between tax collection from existing well known taxpayers, and extending the tax base to include tax evaders (Terkper, 2003). • Strategic behavior from taxpayers, who may break-up their activities in order to remain below the LTU threshold= > a missing middle.

5. VAT: strengths and weaknesses • Introduced in France (1954): a tax on final consumption. • Two properties: • Neutral on production decisions. • Self-enforcing:collected by firms at the various stages of production and distribution through the invoice-credit mechanism, which provides an incentive to report purchases (input) in order to claim a credit against VAT on sales (output). • Strengths: • An incentive to formalize economic activity since the informal sector would be considered as final consumer and would support all the VAT paid on its inputs; • Devolution of a part of the tax collection effort to the private sector,. • Weaknesses • Poorly implemented in Africa: • High VAT rates, which created pressure for exemptions • Inadequate registration threshold • Exposed to lobby groups for tax expenditure every year.

6. SARA: strengths and weaknesses • A drastic reform: delegating tax collection to an autonomous agency (Kydland and Prescott, 1994) • Strengths: • Autonomy (which may differ significantly across countries) = a signal to a more credible audit policy without any political interference (Taliercio, 2004). • Signal effect reinforced by the greater flexibility of SARA to manage its human resources than standard public sector agencies (Fjeldstadt and Moore, 2009 and Moore, 2014). • Merger of tax and customs administrations into a single entity. • Weaknesses • Credibility of the commitment non sufficient (< an independent Central Bank). • A threat on the consistency of policymaking due to the separation between tax collection and tax policy (Fjeldstad and Moore, 2009). • The mobility of tax auditors from SARA to the private sector => conflicts of interests, revolving doors.

7. Data and stylized facts (Average tax revenue to GDP in SSA over 1980-2010)

8. The adoption of LTU, VAT and SARA in SSA (1980-2010)

9. Reform sequencing

10. Empirical analysis • Several techniques: • Fixed-effects estimates and dynamic panel with fixed-effects, • Propensity score matching estimates, • Synthetic control method which is a generalization of the difference-in-difference technique. • Why? • Due to the issue of the self-selection associated with the decisions to adopt each reform. • No random assignment of the allocation of LTUs, VAT and SARAs between countries. • Potentially large selection-bias associated with the decision to adopt (and maintain) a tax reform. For example, countries with poor performance in revenue mobilization are more likely to embark into ambitious reforms aimed at reversing the trend. • Expectation: • A positive impact on revenues of each reform; • The impact of any combination of these reforms.

11. Fixed-effects estimates • The baseline specification: • A linear relationship between the tax revenue-to-GDP ratio and each dummy variable representing each of the three tax reforms. The dummies take the value 1 whenever a country has in place a VAT, LTU, or a SARA, and 0 otherwise. • where T and R denote the tax revenue-to-GDP ratio and the dummy variable identifying the presence of each of the three tax reforms considered.. X refers to the matrix of control variable discussed above while ui denotes the country fixed-effects.

12. Fixed effects estimation results

13. Propensity score matching estimates • A two-step approach • First: the probability of observing either the VAT, LTU or SARA in a given country at year t, is estimated conditional on observable economic conditions and country characteristics (selection model) • Second: these probabilities, or propensity scores, are used to match reform countries to non-reformer countries, and thereby construct a statistical control group. • Test the sequencing of the reforms: for each reform, we investigate whether the initial adoption of a given tax reform determines the probability of adopting a subsequent one.

16. Synthetic control method (SCM) • Approach developed by Abadie and Gardeazabal (2003) and extended in Abadie, Diamond, and Hainmueller (2010). • Question: Does the adoption of the VAT, the LTU or the SARA in year T lead to higher tax-to-GDP ratio in the years T+i (i=1,…,10)compared to similar countries that have not implemented such reforms? • Advantages of SCM: • A transparent estimation of the counterfactual outcome of the treated country —the synthetic control. • SCM can deal with endogeneity from omitted variable bias by accounting for the presence of time-varying unobservable confounders.

17. Effect of the adoption of LTU

18. Effect of the adoption of VAT

19. Effect of the adoption of SARA

20. Conclusion • Both VAT and SARA have significant positive effects on tax revenue mobilization. • The LTU reform is not found to exert any particularly significant effect on revenues. • Tax administrations focused on large taxpayers even before LTUs were implemented; • LTUs centralized compliance services to large firms, which may have had an impact on their compliance costs but limited impact on revenues. • Another factor is the use of information in risk management and audit, areas where LTUs bring very little. • The lack of impact of the LTU may be due to missing accompanying measures, such as better access to information, both internal and external to government. • Practical policy implications of our results: • Fundamental tax reform such as VAT and SARA has a good chance of mobilizing addition revenues in SSA • Marginal reforms, such as introduction of LTU, especially if unaccompanied by other reforms, have little impact (if any) on revenue.

21. Caveats • First, the benefits of tax reforms should be weighed against their costs, which differ across the various reforms • LTU is certainly the cheaper reform. • VAT involves a significant compliance cost for the private sector. • SARAs in SSA countries have been largely supported by donors and their operational costs are estimated to two percent of tax revenue in the Eastern African Community. • Second, our analysis covers non-resource revenue only, but as we noted earlier, much of the increase in revenue in SSA since the mid-1990s came from resource revenues. • Third, a number of SSA countries recently revised their GDP figures upward, and by a significant margin.

22. Thank you for your attention

23. The issue of statistical interferences • SUTVA: • All previous estimation methods are based on the assumption of no interferences between units (countries) = the stable-unit treatment value assumption (SUTVA). • Potential positive tax spillovers effects among neighboring countries => A potentially downward bias. • The absence of interference among countries = the absence of any tax competition and more broadly any tax (policies and reforms) spillovers between countries. • If one of the studied tax reform is effective in improving revenue mobilization • increase in the effective tax rate, whatever is the tax base: income or consumption. • some tax base effect in neighboring countries: the increase in the effective tax rate in one country after a tax reform may induce an outflow of mobile factors (capital, skilled workers…) or some cross-border shopping, which means a broadening of the tax base in neighboring countries • tax revenue increase in the synthetic group. • A downward bias.