Publication: Trade-offs in the Design of Simplified Tax Regimes: Evidence from Sub-Saharan Africa
Loading...
Date
2024-09-19
ISSN
Published
2024-09-19
Author(s)
Hoy, Christopher
Scot, Thiago
Oguso, Alex
Zalo, Daniel
Doino, Ruggero
Karver, Jonathan
Orgeira Pillai, Nicolas
Editor(s)
Abstract
This paper provides novel evidence of the trade-offs policy makers face when designing simplified tax regimes for small businesses. First, it provides a comprehensive stocktaking of the main features of these regimes across Sub-Saharan Africa: they are adopted by two-thirds of countries, but their design varies greatly. Second, it draws on administrative and survey data for a thorough examination of a specific simplified tax regime. This analysis shows most small businesses lack knowledge about design features, such as the existence of a minimum exemption threshold, but they react strongly to increases in tax rates by lowering their declared turnover. Finally, the paper presents the results of an experiment that encourages taxpayers to pay fixed amounts—a potential alternative design of a simplified tax regime that aims for a better balance of the trade-offs facing policy makers. The findings show that providing simple guidance about how much small businesses with similar characteristics typically pay in taxes can increase revenue, but this reduces equity among taxpayers.
Link to Data Set
Citation
“Hoy, Christopher; Scot, Thiago; Oguso, Alex; Custers, Anna; Zalo, Daniel; Doino, Ruggero; Karver, Jonathan; Orgeira Pillai, Nicolas. 2024. Trade-offs in the Design of Simplified Tax Regimes: Evidence from Sub-Saharan Africa. Policy Research Working Paper; 10909. © World Bank. http://hdl.handle.net/10986/42165 License: CC BY 3.0 IGO.”
Associated URLs
Associated content
Other publications in this report series
Publication Geopolitics and the World Trading System(Washington, DC: World Bank, 2024-12-23)Until the beginning of this century, the GATT/WTO system worked. Economic research provided a compelling explanation. It showed that if governments maximize the well-being of their own countries broadly defined, GATT/WTO principles would facilitate mutually beneficial cooperation over their trade policy choices. Now heightened geopolitical rivalry seems to have undermined the WTO. A simple transposition of the previous rationalization suggests that geopolitics and trade cooperation are not compatible. The paper shows that this is only true if rivalry eclipses any consideration of own-country well-being. In all other circumstances, there are gains from trade cooperation even with geopolitics. Furthermore, the WTO’s relevance is in question only if it adheres too rigidly to its existing rules and norms. Through measured adaptation to the geopolitical imperative, the WTO can continue to thrive as a forum for multilateral trade cooperation in the age of geopolitics.Publication Chinese Imports and Industrialization in Africa(Washington, DC: World Bank, 2025-05-12)The rise of China in the global economy has been linked with negative impacts on employment across many high- and middle-income countries. However, evidence for African countries is limited. This paper investigates the causal relationship between Chinese imports and manufacturing employment in Ethiopia. Imports may harm domestic firms through a revenue effect (lower market shares) or benefit them, indirectly if competition spurs innovation or directly through access to better quality or cheaper inputs. The analysis shows that a one unit increase in import penetration leads to a 15.2 percent increase in industry employment. The inputs effect is disentangled from the other two effects by decomposing total Chinese imports by their end-use category using input-output tables. The evidence shows that imported intermediate inputs are driving the employment gains. The findings are consistent with the idea that employment gains are a result of productivity gains and increases in capacity utilization. These employment gains appear to benefit large firms and labor-intensive industries disproportionately.Publication VAT Exemptions, Embedded Tax, and Unintended Consequences(Washington, DC: World Bank, 2025-05-15)The value-added tax (VAT) has proved to be a highly effective tool at raising revenue in developed and developing countries alike. However, the effective operation of the VAT breaks down in the presence of exemptions. Unlike zero rates, exemptions deny input tax credits, thereby increasing production costs and resulting in VAT being embedded within the prices of goods and services. This paper develops a VAT model based on input-output table and household budget survey data for 29 European countries to examine the effects of VAT exemptions on final prices and to assess the merits of their use. Simulation results show that exemptions suffer from the same targeting problems as reduced VAT rates, but, in addition, they are non-transparent and have unpredictable and counterproductive indirect effects. These effects are in addition to the well-known distortionary impact of exemptions on production decisions, and their creation of incentives to self-supply. The paper concludes that the use of exemptions should be limited to addressing pragmatic concerns, such as the disproportionate compliance costs of small businesses and the practical difficulty in taxing margin-based financial services.Publication Disentangling the Key Economic Channels through Which Infrastructure Affects Jobs(Washington, DC: World Bank, 2025-04-03)This paper takes stock of the literature on infrastructure and jobs published since the early 2000s, using a conceptual framework to identify the key channels through which different types of infrastructure impact jobs. Where relevant, it highlights the different approaches and findings in the cases of energy, digital, and transport infrastructure. Overall, the literature review provides strong evidence of infrastructure’s positive impact on employment, particularly for women. In the case of electricity, this impact arises from freeing time that would otherwise be spent on household tasks. Similarly, digital infrastructure, particularly mobile phone coverage, has demonstrated positive labor market effects, often driven by private sector investments rather than large public expenditures, which are typically required for other large-scale infrastructure projects. The evidence on structural transformation is also positive, with some notable exceptions, such as studies that find no significant impact on structural transformation in rural India in the cases of electricity and roads. Even with better market connections, remote areas may continue to lack economic opportunities, due to the absence of agglomeration economies and complementary inputs such as human capital. Accordingly, reducing transport costs alone may not be sufficient to drive economic transformation in rural areas. The spatial dimension of transformation is particularly relevant for transport, both internationally—by enhancing trade integration—and within countries, where economic development tends to drive firms and jobs toward urban centers, benefitting from economies scale and network effects. Turning to organizational transformation, evidence on skill bias in developing countries is more mixed than in developed countries and may vary considerably by context. Further research, especially on the possible reasons explaining the differences between developed and developing economies, is needed.Publication Economic Consequences of Trade and Global Value Chain Integration(World Bank, Washington, DC, 2025-04-04)This paper introduces a new approach to measuring Global Value Chains (GVC), crucial for informed policy-making. It features a tripartite classification (backward, forward, and two-sided) covering trade and production data. The findings indicate that traditional trade-based GVC metrics significantly underestimate global GVC activity, especially in sectors like services and upstream manufacturing, and overstate risks in early trade liberalization stages. Additionally, conventional backward-forward classifications over-estimate backward linkages. The paper further applies these measures empirically to assess how GVC participation mediates the impact of demand shocks on domestic output, highlighting both the exposure and stabilizing potential of GVC integration. These new measures are comprehensively available on the World Bank’s WITS Platform, providing a key resource for GVC analysis.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Lying to the Taxman or Accepting a Helping Hand?(Washington, DC: World Bank, 2025-02-10)This paper presents the results from a novel field experiment that examined the impact of in- creasing the presence of revenue authority officers on tax compliance and tax morale among small and medium-size enterprises in a lower-income country. The experiment was embedded in the implementation of a representative, face-to-face survey of SMEs across mainland Tanzania. An independent survey firm was accompanied by Tanzania Revenue Authority officers, who observed the interviews in a randomly selected set of urban and peri-urban wards. This translated into a temporary increase in the presence of tax officers throughout parts of the country. The findings indicate that an increase in tax officer presence did not have a significant overall impact on tax compliance and tax morale among SMEs, as measured using a combination of administrative and survey data. However, there were short-term increases in compliance in the largest city and sustained increases in tax morale in the rest of the country. A follow-up survey suggests that these results were likely driven by an increase in the perceived credibility of enforcement rather than meaningful increases in perceptions of facilitation and trust.Publication Firms’ Networks Under Export Exemption Regimes(Washington, DC: World Bank, 2024-05-21)This report uses administrative tax data on firm-to-firm trade in Honduras to evaluate the degree of integration between firms receiving export-oriented tax exemptions and the local economy. We present five stylized facts regarding firms’ trade networks in Honduras and show that, across several dimensions, the networks of firms in export-oriented regimes do not differ from those of other similarly sized firms. Our findings challenge the idea that export-oriented regimes benefit firms with no connections to the local economy.Publication Human Capital, Trade Liberalization, and Income Risk(World Bank, Washington, DC, 2007-07)Using data from Mexico, the authors study empirically the link between trade policy and individual income risk and the extent to which this varies across workers of different human capital (education) levels. They use longitudinal income data on workers to estimate time-varying individual income risk parameters in different manufacturing sectors in Mexico between 1987 and 1998, a period in which the Mexican economy experienced substantial changes in trade policy. In a second step, they use the variations in trade policy across different sectors and over time to estimate the link between trade policy and income risk for workers of varying education levels. The authors' findings are as follows. The level of openness of an economy is not found to be related to income risk for workers of any type. Furthermore, changes in trade policy (that is, trade policy reforms) are not found to have any effect on the risk to income faced by workers with either low or high levels of human capital. But workers with intermediate levels of human capital are found to experience a statistically and economically significant increase in income risk immediately following liberalization of trade. The findings thus point to an interesting non-monotonicity in the interaction between human capital, income risk and trade policy changes.Publication Sifting through the Data(World Bank, Washington, DC, 2016-02)In Latin America, labor markets have been the main channel through which growth has reduced poverty, with higher labor income accounting for 49 percent of the reduction in poverty in 2008–13. Understanding labor markets is critical to designing policies and programs aimed at reducing poverty. With close to 70 percent of the population under age 30 years, labor markets are bound to be central to defining Haiti's future. Yet, labor analysis in Haiti has been constrained by the dearth of data and the focus on measuring the impact of the 2010 earthquake. This present paper contributes to filling this gap by providing an overview of Haiti's labor markets and the determinants of labor income over a decade, focusing on growing urban areas. The paper also contributes to the research on Haiti in general, as well as labor markets in fragile countries such as Haiti, in particular through an unprecedented effort to harmonize three household surveys conducted between 2001 and 2012. Building on this exercise, the study provides new insights into the development of labor markets in a particularly turbulent decade for Haiti, one that was marked by the political crisis of 2004 and the earthquake of 2010. In spite of the earthquake, the analysis shows that Haiti’s labor markets are characterized by continuity over the period. Somewhat surprisingly, the defining features remain overall unchanged in spite of the shock, pointing to heavy forces shaping economic and labor dynamics.Publication Sticky Feet : How Labor Market Frictions Shape the Impact of International Trade on Jobs and Wages(Washington, DC: World Bank, 2014-06-17)This report analyzes the paths by which developing country labor markets adjust to permanent trade-related shocks. Trade shocks can bring about reallocation of labor between industries, but the presence of labor mobility costs implies economy-wide losses because they extend the period of economic adjustment. This report focuses primarily on the adjustment costs faced by workers after a trade shock, because of magnitude and welfare implications and policy relevance. From a policy viewpoint, understanding the relative magnitudes of labor mobility and adjustment costs can help policymakers design trade policies that are consistent with employment objectives, can be complemented by labor policies, or support programs to facilitate labor transitions, or both. To complement and validate the analysis based on structural choice models, the study designed a distinct empirical approach using reduced-form econometric estimation strategies. This approach examines the impact of structural reforms and worker displacement on labor market outcomes. This makes it possible to estimate the time required to adjust to a trade-related shock, but does not assume the rigid underlying relationship inherent in structural models. This report is organized as follows: chapter one gives introduction. Chapter two presents evidence from the literature on the relative magnitude of labor adjustment costs borne by workers and by firms. Chapter three presents a new database of country-level labor mobility cost estimates for both developing and developed economies. Chapter four showcases country case studies in which labor mobility costs vary by industry, firm size, and worker type (for example, informal versus. formal). Chapter five analyzes the impact of structural reforms on aggregate labor market outcomes across countries and the effect of worker displacement due to plant closings on the employment outcomes of individual workers in Mexico. Chapter six concludes with a summary of the main findings about the labor adjustment costs associated with trade-related shocks and a discussion of policy responses internationally.
Users also downloaded
Showing related downloaded files
Publication Digital Public Infrastructure and Development(Washington, DC: World Bank, 2025-03-11)DPI is an approach to digitalization focused on creating “foundational, digital building blocks designed for the public benefit.” By providing essential digital functions at society scale that can be reused across sectors, DPIs enable public and private service providers to build on these systems, innovate, and roll out new services more quickly and efficiently. Common systems built as DPIs include digital identity and electronic signatures, digital payments, and data sharing. However, to provide DPI functionality, these systems must embed principles such as inclusion, openness, modularity, inclusivity, user-centricity, privacy-by-design, and strong governance. This paper provides a common framework and primer on DPI for policymakers, practitioners, WBG staff, and the broader development community, including: • DPI Concepts and Theory of Change: This includes a working definition of DPI and its core characteristics, including the role of the private sector, how DPI differs from past approaches to digitalization, and the relationship between core DPI systems, sector-specific systems, other digital technologies, and broader ecosystem enablers and safeguards. The paper also articulates the potential benefits of DPI across a range of public and private sector services, as well as risks and challenges for implementation and adoption. • Considerations for Implementation: Drawing on the experiences of a diverse set of countries across different regions, income levels, and DPI approaches, the paper identifies common trends for building, scaling, and using DPIs that are safe and inclusive. This includes identifying what we know (and do not yet know) around different DPI design choices and models, implementation strategies, procurement, issues around use case integration and sequencing of DPI, and more. • Principles and Practical Lessons: Finally, it summarizes key lessons from countries’ experiences with DPI to date, highlighting critical success factors and risk mitigation strategies for policymakers, practitioners, and development partners. A separate volume provides examples of DPI from countries around the globe. By leveraging the opportunities presented by DPI, countries can accelerate their digital transformation journeys and achieve more inclusive and sustainable development. The World Bank Group is committed to supporting this crucial endeavor. The WBG’s new Global DPI Program will address key knowledge gaps and support countries in building safe, inclusive, and transformative DPI.Publication World Bank Annual Report 2024(Washington, DC: World Bank, 2024-10-25)This annual report, which covers the period from July 1, 2023, to June 30, 2024, has been prepared by the Executive Directors of both the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA)—collectively known as the World Bank—in accordance with the respective bylaws of the two institutions. Ajay Banga, President of the World Bank Group and Chairman of the Board of Executive Directors, has submitted this report, together with the accompanying administrative budgets and audited financial statements, to the Board of Governors.Publication Data for Better Governance: Building Government Analytics Ecosystems in Latin America and the Caribbean(Washington, DC: World Bank, 2024-11-25)Governments in the Latin America and the Caribbean (LAC) region face significant developmental and institutional challenges, such as slowing growth, fiscal constraints, and inefficiencies in the public sector. At the same time, governments have invested significantly in government technologies (GovTech), making LAC a global pioneer in management information systems (MISs). This investment creates an opportunity for governments to leverage MIS data to strengthen the functioning of government and achieve development goals—that is, government analytics. This report provides a conceptual framework to assess and provide guidance on the regional government analytics agenda and how to harvest the benefits of GovTech investments. It examines how government analytics can inform policy making and improve accountability and efficiency, drawing on survey data and successful applications of government analytics. The report also explores the enabling conditions for government analytics—data infrastructure and analytical capabilities—and how to strengthen them. Finally, it provides practical guidance on how to develop a holistic government analytics agenda. "Data for Better Governance: Building Government Analytics Ecosystems in Latin America and the Caribbean" is part of the Government Analytics collection, which began with The Government Analytics Handbook (2023). This growing series features frontier evidence and expert insights on how to leverage data to improve government performance.Publication Business Ready 2024(Washington, DC: World Bank, 2024-10-03)Business Ready (B-READY) is a new World Bank Group corporate flagship report that evaluates the business and investment climate worldwide. It replaces and improves upon the Doing Business project. B-READY provides a comprehensive data set and description of the factors that strengthen the private sector, not only by advancing the interests of individual firms but also by elevating the interests of workers, consumers, potential new enterprises, and the natural environment. This 2024 report introduces a new analytical framework that benchmarks economies based on three pillars: Regulatory Framework, Public Services, and Operational Efficiency. The analysis centers on 10 topics essential for private sector development that correspond to various stages of the life cycle of a firm. The report also offers insights into three cross-cutting themes that are relevant for modern economies: digital adoption, environmental sustainability, and gender. B-READY draws on a robust data collection process that includes specially tailored expert questionnaires and firm-level surveys. The 2024 report, which covers 50 economies, serves as the first in a series that will expand in geographical coverage and refine its methodology over time, supporting reform advocacy, policy guidance, and further analysis and research.Publication Global Economic Prospects, January 2025(Washington, DC: World Bank, 2025-01-16)Global growth is expected to hold steady at 2.7 percent in 2025-26. However, the global economy appears to be settling at a low growth rate that will be insufficient to foster sustained economic development—with the possibility of further headwinds from heightened policy uncertainty and adverse trade policy shifts, geopolitical tensions, persistent inflation, and climate-related natural disasters. Against this backdrop, emerging market and developing economies are set to enter the second quarter of the twenty-first century with per capita incomes on a trajectory that implies substantially slower catch-up toward advanced-economy living standards than they previously experienced. Without course corrections, most low-income countries are unlikely to graduate to middle-income status by the middle of the century. Policy action at both global and national levels is needed to foster a more favorable external environment, enhance macroeconomic stability, reduce structural constraints, address the effects of climate change, and thus accelerate long-term growth and development.