Despite substantial increases in the amount of domestic tax revenue collected in many developing countries over the past few decades, the share which comes from employment income is still significantly lower than in richer regions. Today, personal income taxes account for, on average, a quarter of total taxes collected in OECD countries, compared to just 15% Africa and 9% in Latin America and the Caribbean, respectively (Source: https://stats.oecd.org). Whilst there are numerous explanations underlying this trend, such as a continued reliance on taxes on international trade, or a large informal sector, there remains substantial scope, in many countries, to better utilise the taxation of employment income in order to expand the tax base, encourage compliance, and ensure that such taxation is simple, fair and progressive.
At the heart of achieving these aims lies both good policy design and effective administration. Yet, there exists relatively little research that studies how employment income is taxed in developing countries, how it has evolved over time and how this, in turn, has shaped taxpayer behaviour.
The TaxDev Employment Income Taxes Dataset (EITD) will inform several TaxDev research studies that aim to present new evidence in this space. The dataset itself includes a large range of comparable indicators for low- and middle- income countries, allowing us to study the evolution of rates, thresholds, bands, credits and allowances across countries and over time. The data will also be made publicly available and it is hoped that it will serve as a key resource for researchers interested in questions surrounding personal income tax design and the behaviour of taxpayers during reform periods.
When policymakers think about employment income tax reform, one natural question might be “Where should the rates, bands and thresholds be set?”. Economists refer to optimal taxation theory or balancing the key principles of taxation, such as equity and efficiency, by setting rates to maximise revenue collected, taking into consideration the ability to pay, re-distributional objectives and allowing for behavioural effects of wage taxes on labour supply etc. In practice, a typical structure has emerged which includes a limited number of progressive marginal rates, tax-free allowance for the lowest incomes and regular indexing to inflation.
However, a range of socio-economic, political and practical factors are involved in policymaking which has resulted in a wide variation in the design of personal income taxes across countries and over time, which raises questions about how the design of income tax has evolved and the extent to which the current structures are appropriate to meeting their intended objectives. Specifically, interesting questions exist regarding the progressivity of income tax schedules: some, for example, have many different bands, whilst others just one or two or even charge a flat rate. The PAYE can be a powerful redistributive tool and the EITD will help us to understand exactly how different countries approach issues related to inequality and redistribution.
The EITD will prove a valuable resource with which to explore these questions, and beyond. The data will be compiled by gathering and combining a range of publicly available information from individual government, IMF, World Bank and private sector sources.
The first version of the EITD – which includes comprehensive data for African countries – will be made available during 2021, with an accompanying working paper describing the dataset’s construction and highlighting some initial findings.
An initial reading of the data gathered so far from Africa shows us that today, for example, employment income tax schedules in many countries retain features inherited from their former colonial structures, that some schedules have their roots as a function of wage levels, or perhaps most starkly, it highlights that many countries do not regularly update their schedules at all, despite environments featuring significant levels of inflation and stagnant wage growth. This, naturally, leads to questions surrounding the effects of ‘bracket creep’ on consumers’ disposable incomes and purchasing power, and the related economic impacts.
The EITD also reveals a number of interesting curiosities: Did you know, for example, that the income tax schedule was updated monthly during the hyperinflation crisis in Zimbabwe, that in the early 2010s, Cabo Verde had no fewer than fifty-three income tax bands, or that Tunisia did not change its rates and bands at all between the years of 1993 and 2015?
Published on: 26th January 2021