Unlocking the Potential of Administrative Data in Africa: Tax Compliance and Progressivity in Rwanda

Abstract

This paper is the first in a series of three studies looking at tax compliance using administrative data from Rwanda. It discusses the use of administrative data for tax research specifically anonymised taxpayers records, which have become increasingly available on the African continent. The paper starts by critically summarising the key advantages and disadvantages of using this data for tax research in Africa. It proceeds to illustrate these opportunities and challenges in practice, using the case of Rwanda for application of the data to analyse tax compliance and progressivity. By doing this it shows some stylised factsfor example that tax systems designed to be progressive can still be regressive in practice, that a great share of tax revenue is generated by a few very large taxpayers, and that some taxpayers face a negligible probability of being audited. Although these results are specific to Rwanda, they are in line with the situation in other low-income countries in Africa.

One Size Does Not Fit All: A Field Experiment on the Drivers of Tax Compliance and Delivery Methods in Rwanda

“…Consequently, taxpayers in our sample are likely to have some margin to increase their compliance and therefore to respond to our nudges. A companion study based on the same administrative data from Rwanda shows that the compliance gap is indeed larger for these tax types than for VAT and PAYE (Mascagni et al 2016a), thus justifying our focus on these tax types.…”

“…This figure is in line with other African and low-income countries, despite the absence of significant natural resources in the country. Moreover, as compared to other African countries, Rwanda collects proportionally more income taxes -about a third of total revenue (Mascagni et al 2016a;ATAF 2016). However, descriptive evidence (Mascagni et al 2016a) suggests that in Rwanda non-compliance is a larger issue for income taxes than for Value Added Tax (VAT) or Pay As You Earn (PAYE) taxes, thus making it relevant to focus on those.…”

“…Moreover, as compared to other African countries, Rwanda collects proportionally more income taxes -about a third of total revenue (Mascagni et al 2016a;ATAF 2016). However, descriptive evidence (Mascagni et al 2016a) suggests that in Rwanda non-compliance is a larger issue for income taxes than for Value Added Tax (VAT) or Pay As You Earn (PAYE) taxes, thus making it relevant to focus on those. Income taxes are typically seen as hard to collect and often represent a minor share of total revenue in many low-income countries, as opposed to the major role they play in high-income countries' budgets (Besley and Persson 2013).…”

“…Although this behaviour seems puzzling, there are at least two possible explanations. The first one is that this is a way to avoid fines for non-filing while still managing to avoid paying any income tax (Mascagni et al 2016a;Mascagni and Mengistu 2016). The second one is that processes for de-registration are so complex that taxpayers prefer to remain registered and keep filing nil returns.…”

“…In lowincome countries, this often results in higher compliance costs and even larger tax burdens than large taxpayers (Coolidge 2012;Yesegat, Vorontsov, Coolidge and Corthay 2015;Mascagni and Mengistu 2016). Second, it is very unlikely for the RRA to get in touch with small taxpayers with formal audits or even informal checks (Mascagni et al 2016a). This is likely to result in a low perceived probability of detection, which may be corrected upwards (with a compliance effect) as a response to any personalised message from the tax authority, and particularly to letters.…”