Download - Tax Performance and Tax Efficiency
i
ZIMBABWE REVENUE AUTHORITY
KURIMATRAINING SCHOOL
An Empirical Analysis Of Tax Performance and Tax
Efficiency: Reference To The Concept of Income in Tax Law
and Policy (Haig-Simons-Hicks Definition of Income)
BY
WELLINGTON GARIKAI BONGA
EC# : 04103858
SAP#: 3116
TRAINER: Mrs FM Banda
This research is submitted in partial fulfillment of the requirements of ZIMRA
Kurima Training School.
ZIMRA : Kurima Training School
OCTOBER 2011
ii
DEDICATION
To my beloved wife (Elsie), mother (Beauty), brothers (Kassian, Robert, Moses) & sisters
(Virginia, Ellen).
To them, I say, “Thanks for your encouragement, in the better of me.”
God Bless!
iii
ACKNOWLEDGEMENTS First and foremost, I would like to express my sincere gratitude to my dear supervisor Mrs FM
Banda for her constructive suggestions and guidance throughout the study. Without her
supervision, I would have not gone this far. Mr O Chasiyeni should also be credited for
introducing the subject to me during training sessions. I will extend my gratitude to Mr T
Kativhu for his constructive suggestions and comments. While Mr L Tatsvareyi, is worth to be
noted for his ideas and comments on the construction of the research.
Special thanks should also be given to my family members for their financial, spiritual and moral
support throughout my educational successes.
I also wish to thank everyone in my March 2011 Trainee Group for their encouragement and
academic help they provided during the course of the study. In Beitbridge Class I will single out
Manyika Ashton, Prince Makoni, Rinomhota Nakai and Cheryl Zigora for their closest
friendship and continuous concern to the success of my research. In Bulawayo Class I will
mention Murongerwi Andrew, Nombeko Gumbo and Gugulethu Mpofu for constant
encouragement during course of training. To them I say, “Keep up this spirit of industry.”
With due respect, I also acknowledge, the guidance of the Almighty, God, for taking me through
this challenging time of my life. I owe everything to Him.
All views, errors, and omissions are my own and should not be attributed to any person or
organisation mentioned above.
Bonga Wellington Garikai
iv
ABSTRACT
Fulfilling Ministry of Finance targets in revenue collection may not define efficiency in tax
collection and accurate implementation of tax laws and policy by the Zimbabwe Revenue
Authority. The study recognises the challenges in defining national income in developing nations
as compared to the standard definition formulated from the commonly known as the Haig-
Simons-Hicks definition of income. The study through the calculation of tax buoyancy and
elasticity managed to identify that the revenue being collected is below the maximum possible
(potential), and the efficiency of ZIMRA may be improved. Several factors have been cited
including time lags between policy announcement and policy implementation, staff migration,
lack of job security, lack of resources among others. The study suggest that time lags should be
shortened for tax law formulation and tax law implementation, certain ways should be designed
to define taxable income from the informal sector and other hard to tax sectors using the HSH
definition, general tax base broadening, issues of staff shortages, implementation tools and
improvement in tax administration.
v
CONTENTS DEDICATION............................................................................................................................... ii
ACKNOWLEDGEMENTS ........................................................................................................ iii
ABSTRACT .................................................................................................................................. iv
CONTENTS................................................................................................................................... v
LIST OF TABLES AND FIGURES .......................................................................................... vii
LIST OF TABLES .................................................................................................................. vii
LIST OF FIGURES ................................................................................................................ vii
ACRONYMS .............................................................................................................................. viii
CHAPTER ONE ........................................................................................................................... 1
INTRODUCTION......................................................................................................................... 1
1.0 INTRODUCTION .................................................................................................................... 1
1.1 BACKGROUND ...................................................................................................................... 3
1.1.1 TAX SYSTEM IN ZIMBABWE ........................................................................................... 3
1.1.2 TAX STRUCTURES DEVELOPING NATIONS ................................................................ 4
1.1.3 COMPOSITION OF TAXES IN ZIMBABWE ................................................................... 7
1.1.4 SEMI-AUTONOMOUS REVENUE AUTHORITIES ......................................................... 8
1.1.5 NATIONAL TAXABLE INCOME ....................................................................................... 9
1.1.6 EFFICIENCY OF ZIMRA IN TAX COLLECTION .......................................................... 10
1.2 PROBLEM STATEMENT ..................................................................................................... 12
1.3 RESEARCH OBJECTIVES ................................................................................................... 13
1.4 RESEARCH QUESTIONS ..................................................................................................... 13
1.5 RESEARCH METHODOLOGY ............................................................................................ 14
1.6 DATA COLLECTION TECHNIQUES ................................................................................. 14
1.7 SIGNIFICANCE OF THE STUDY ........................................................................................ 15
1.8 LIMITATIONS OF THE STUDY .......................................................................................... 15
1.9 OUTLINE OF THE STUDY .................................................................................................. 15
CHAPTER TWO ........................................................................................................................ 16
LITERATURE REVIEW .......................................................................................................... 16
2.0 INTRODUCTION .......................................................................................................... 16
2.1 THE0RETICAL LITERATURE REVIEW ................................................................... 16
2.2 EMPIRICAL LITERATURE REVIEW ........................................................................ 17
2.3 CONCLUSION .............................................................................................................. 20
CHAPTER THREE .................................................................................................................... 21
RESEARCH METHODOLOGY .............................................................................................. 21
3.0 INTRODUCTION .......................................................................................................... 21
3.1 RESEARCH DESIGN ................................................................................................... 21
3.2 DATA TYPES................................................................................................................ 22
3.3 EMPIRICAL MODEL ................................................................................................... 23
3.4 DATA COLLECTION PROCEDURES AND SOURCES ........................................... 24
3.5 DATA ANALYSIS AND PRESENTATION TECHNIQUES ..................................... 24
3.6 CONCLUSION .............................................................................................................. 24
CHAPTER FOUR ....................................................................................................................... 25
DATA PRESENTATION AND ANALYSIS ............................................................................ 25
4.0 INTRODUCTION .......................................................................................................... 25
4.1 TAX RATIO .................................................................................................................. 25
vi
4.2 AVERAGE TAX BUOYANCY (REGRESSION) ....................................................... 26
4.3 ANNUAL TAX BUOYANCY ...................................................................................... 27
4.4 TAX ELASTICITY........................................................................................................ 28
4.5 CONCLUSION .............................................................................................................. 29
CHAPTER FIVE ........................................................................................................................ 30
RECOMMENDATIONS AND CONCLUSION ...................................................................... 30
5.0 INTRODUCTION .......................................................................................................... 30
5.1 CONCLUSION .............................................................................................................. 30
5.2 POLICY RECOMMENDATIONS ................................................................................ 31
5.3 FUTURE AREAS OF RESEARCH .............................................................................. 32
REFERENCE ................................................................................................................................ 33
vii
LIST OF TABLES AND FIGURES
LIST OF TABLES Table 1: Revenue Collections by ZIMRA against Ministry of Finance Target (2001-2011) ... .... ... .... .... ... ... ... ......7 Table 2 : Collections as a Percentage of GDP... .... ..... ..... ....... ...... ....... ....... ....... ...... ....... .... ..... ...... ..... .............7 Table 3: ZIMRA Efficiency Vs MOF Target ... ..... ...... ...... ...... ...... ...... ...... ...... ...... ..... ..... ...... ..... ..... ..... ..... .. 8 Table 4: Annual Tax Buoyancy For Period 2000 – 2010 ... .... .... ..... ..... ...... ...... ....... ...... ...... ....... ...... ... ...........22 Table 5: Ordinary Least Squares Regression (Proportional Adjustment Method) ... .... .... .... ..... .... ..... .... ..... ..... .24
LIST OF FIGURES Figure 1: Domestic Tax Revenue Contribution ........ ... .... ..... ..... .... ..... ...... ..... ..... .... .... ..... ..... .... .... ................ 6 Figure 2: Tax Performance as a percentage of GDP .... ..... ..... ..... ..... ..... ..... ...... ..... ..... ..... ..... .... ..... ..... ...... ... 11 Figure 3: Tax Ratio (2000-2010) .... .... ..... ..... ..... ..... ...... ....... ...... ...... ...... ...... ...... ....... ....... ...... .... ................ 21 Figure 4: Annual Tax Buoyancy for Period 2000 – 2010 ... ..... ..... ...... ..... ...... ...... ....... ....... ....... ...... ..... ........... 23
viii
ACRONYMS
ARA - Semi-Autonomous Revenue Authority
GDP - Gross Domestic Product
HSH - Haig-Simons-Hicks
IMF - International Monetary Fund
MOF - Ministry of Finance
SADC - Southern African Development Committee
SNA - Systems of National Accounts
VAT - Value Added Tax
ZIMRA - Zimbabwe Revenue Authority
ZIMSTATS - Zimbabwe Statistics
ZWD - Zimbabwe Dollars
1
CHAPTER ONE
INTRODUCTION
1.0 INTRODUCTION
The question "what is income?" has preoccupied many economists and policymakers for a long
time. National rulers have always been interested in an income concept that can be used as a
yardstick for taxation (Musgrave 1985). In the twentieth century, the emergence of demand
management policies and national income accounting also brought substantial government
involvement in developing concepts of income. Economists have been deeply entangled in
developing concepts of taxable income, personal income, and national income in various
capacities: as theoreticians, policymakers, and government bureaucrats (Kendrick 1970, Usher
1987).
A concept of income is worth to be analysed as the tax revenue collected in any economy
depends on the level of income. There is a positive correlation between tax revenue and national
income. This relationship is explained by the differences in revenue performance between
developed nations and developing nations, with the developed nations having higher levels of
performance. The study will utilise the Haig-Simons-Hicks definition of income to comment on
the level of taxable income in the economy. Taxable income will be further compared to the tax
revenue being collected by the Zimbabwe Revenue Authority, that is, tax performance and tax
efficiency. Possible underlying factors will be discussed for the level of tax performance and tax
efficiency levels.
Concepts of personal income and national income used by most government agencies and
economists today have been often compared to the so-called Haig-Simons-Hicks (HSH) concept
of income (Haig 1921, Hicks 1939, Simons 1938). Implicitly or explicitly, this concept is usually
considered the theoretical concept of income. According to the HSH definition, income in a
given period of time is the maximum amount that can be consumed in that period while keeping
real wealth unchanged. The 1993 System of National Accounts (1993 SNA), the landmark
publication on national income accounting put together by prominent international organizations
2
such as the United Nations, expressed the widely-held view that, "from a theoretical point of
view, income is often defined as the maximum amount that a household can consume without
reducing its real net worth." (1993 SNA, Section 8.15, p.186).
The HSH concept is accepted as the theoretical concept of income even by some critics of the
official income statistics: "The theoretical Hicks-Haig-Simons concept of income is that which
we can consume while keeping our real wealth intact. But this is a far cry from the usual
measures of individual incomes, corporate profits or the aggregates of personal and national
income." (Eisner 1989, 2). In the field of household income statistics, a recent study aimed at
developing a uniform definition of household income for the purposes of international
comparisons took as its theoretical starting point the HSH concept (Smeeding and Weinberg
2001, 2).
Given its pervasive influence, it is useful to examine the original context in which the HSH
concept was constructed. Of the three architects, Hicks was arguably the one who made the most
theoretically sophisticated contribution to the concept. At the outset, it is useful to recall a
remarkable feature of Hicks's discussion that appears to have been ignored in the subsequent
literature. Chapter 14 was placed before Part IV of the book, where he purportedly developed a
theory of economic dynamics without using the concept of income (whether that of an individual
or of an entire nation), as well as related categories such as saving, investment, and depreciation.
The explicit purpose of the chapter was to justify this procedure. This justification took the form
of a demonstration that the concept of income was theoretically vacuous. It cannot be defined
unequivocally and any operational definition of income involves a great deal of imprecision. The
notion of a "theoretical concept of income" was for Hicks a contradiction in terms. It is
paradoxical that, given this feature of Hicks's arguments, later economists tend to locate the
theoretical concept of income here.
Tax revenue is very critical for any economy especially developing nations like Zimbabwe. The
revenue is mainly used to purchase or produce public goods like national security, street lights,
and roads and in some cases as emergency for disease outbreaks and drought years. Currently the
3
Zimbabwean nation is relying heavily on tax revenue as the profitability of parastatals1 has
remained a questionable event for the past years.
Tax systems should be adequately stable and buoyant2 in order to enable a country to meet its
increasing financial commitments as its gross domestic product (GDP) grows. If the tax revenue
of a country is stable and buoyant, there is a high probability that its public expenditure needs
will be adequately met over time. If GDP is growing more than tax revenues then it could be one
policy indicator that the tax structure needs reform. The study of tax buoyancy is of much
importance because it is both a quality and quantity measure of tax performance. Tax buoyancy
can also be used to summarize revenue growth over time, (Zolt, 2003:8). Finally, it shows the
strength of the tax system in the country when they are subjected to certain environments for
example when a certain sector is declining.
1.1 BACKGROUND
The background section aims at analysing basic underlying issues of taxation in Zimbabwe and
presenting the tax structure with reasons for such a structure. General comments and facts for the
developing world will also be discussed.
1.1.1 TAX SYSTEM IN ZIMBABWE
Zimbabwe, like some developing countries face formidable challenges when they attempt to
establish efficient tax systems. First, most workers in the country are typically employed in
agriculture and in small informal enterprises. Workers are seldom paid a regular, fixed wage, and
hence their earnings fluctuate, and many are paid in cash (commonly known as "off the books").
This implies that base for an income tax is therefore hard to calculate. Another observed aspect is
that workers in the country rarely spend their earnings in large stores that keep accurate records
of sales and inventories. As a result, modern means of raising revenue, such as income taxes and
consumer taxes, play a diminished role in the country, and the possibility that the government
will achieve high tax levels is virtually excluded.
1 Zimbabwean parastatals have remained loss making for quite long hence main source of government remains tax revenue. 2 The tax system should be responsive to changes in the tax base, usually GDP.
4
Second, it is difficult to create an efficient tax administration without a well-educated and well-
trained staff, when money is lacking to pay good wages to tax officials and to computerize the
operation (or even to provide efficient telephone and mail services), and when taxpayers have
limited ability to keep accounts. As a result, governments often take the path of least resistance,
developing tax systems that allow them to exploit whatever options are available rather than
establishing rational, modern, and efficient tax systems.
Third, because of the informal structure of the economy and because of financial limitations,
statistical and tax offices have difficulty in generating reliable statistics. This lack of data
prevents policymakers from assessing the potential impact of major changes to the tax system.
As a result, marginal changes are often preferred over major structural changes, even when the
latter are clearly preferable. This perpetuates inefficient tax structures.
Fourth, income tends to be unevenly distributed within the country. Although raising high tax
revenues in this situation ideally calls for the rich to be taxed more heavily than the poor, the
economic and political power of rich taxpayers often allows them to prevent fiscal reforms that
would increase their tax burdens. This explains in part why many developing countries have not
fully exploited personal income and property taxes and why their tax systems rarely achieve
satisfactory progressivity.
In summary, tax policy is often the art of the possible rather than the pursuit of the optimal. It is
therefore not surprising that economic theory and especially optimal taxation literature have had
relatively little impact on the design of tax system in Zimbabwe.
1.1.2 TAX STRUCTURES DEVELOPING NATIONS
Tax policies seen in developing countries are puzzling on many dimensions. To begin with,
revenue/GDP is surprisingly small compared with that in developed economies. Taxes on labor
income play a minor role. Taxes on consumption are important, but effective tax rates vary
dramatically by firm, with many firms avoiding taxes entirely by operating through cash in the
5
informal economy and others facing very high liabilities. Taxes on capital are an important
source of revenue, as are tariffs and seignorage, all contrary to the theoretical literature.
Personal Income Tax. Any discussion of personal income tax in developing countries must start
with the observation that this tax has yielded relatively little revenue in most of these countries
and that the number of individuals subject to this tax (especially at the highest marginal rate) is
small. The rate structure of the personal income tax is the most visible policy instrument
available to most governments in developing countries to underscore their commitment to social
justice and hence to gain political support for their policies. Countries frequently attach great
importance to maintaining some degree of nominal progressivity in this tax by applying many
rate brackets, and they are reluctant to adopt reforms that will reduce the number of these
brackets.
More often than not, however, the effectiveness of rate progressivity is severely undercut by high
personal exemptions and the plethora of other exemptions and deductions that benefit those with
high incomes (for example, the exemption of capital gains from tax, generous deductions for
medical and educational expenses, the low taxation of financial income). Tax relief through
deductions is particularly egregious because these deductions typically increase in the higher tax
brackets. Experience compellingly suggests that effective rate progressivity could be improved
by reducing the degree of nominal rate progressivity and the number of brackets and reducing
exemptions and deductions. Indeed, any reasonable equity objective would require no more than
a few nominal rate brackets in the personal income tax structure. If political constraints prevent a
meaningful restructuring of rates, a substantial improvement in equity could still be achieved by
replacing deductions with tax credits, which could deliver the same benefits to taxpayers in all
tax brackets.
Corporate Income Tax. Tax policy issues relating to corporate income tax are numerous and
complex, but particularly relevant for developing countries are the issues of multiple rates based
on sectoral differentiation and the incoherent design of the depreciation system. Developing
countries are more prone to having multiple rates along sectoral lines (including the complete
exemption from tax of certain sectors, especially the parastatal sector) than industrial countries,
6
possibly as a legacy of past economic regimes that emphasized the state's role in resource
allocation. Such practices, however, are clearly detrimental to the proper functioning of market
forces (the sectoral allocation of resources is distorted by differences in tax rates). They are
indefensible if a government's commitment to a market economy is real. Unifying multiple
corporate income tax rates should thus be a priority.
Allowable depreciation of physical assets for tax purposes is an important structural element in
determining the cost of capital and the profitability of investment. The most common
shortcomings found in the depreciation systems in developing countries include too many asset
categories and depreciation rates, excessively low depreciation rates, and a structure of
depreciation rates that is not in accordance with the relative obsolescence rates of different asset
categories. Rectifying these shortcomings should also receive a high priority in tax policy
deliberations in these countries.
Value-Added Tax. While VAT has been adopted in most developing countries, it frequently
suffers from being incomplete in one aspect or another. Many important sectors, most notably
services and the wholesale and retail sector, have been left out of the VAT net, or the credit
mechanism is excessively restrictive (there are denials or delays in providing proper credits for
VAT on inputs), especially when it comes to capital goods. As these features allow a substantial
degree of cascading (increasing the tax burden for the final user), they reduce the benefits from
introducing the VAT in the first place. Rectifying such limitations in the VAT design and
administration should be given priority in developing countries.
Many developing countries have adopted two or more VAT rates. Multiple rates are politically
attractive because they ostensibly serve an equity objective, but the administrative price for
addressing equity concerns through multiple VAT rates may be higher in developing than in
industrial countries. The cost of a multiple-rate system should be carefully scrutinized.
Excise tax. The most notable shortcoming of the excise systems found in many developing
countries is their inappropriately broad coverage of products, often for revenue reasons, Tanzi
and Zee (2001). As is well known, the economic rationale for imposing excises is very different
7
from that for imposing a general consumption tax. While the latter should be broadly based to
maximize revenue with minimum distortion, the former should be highly selective, narrowly
targeting a few goods mainly on the grounds that their consumption entails negative externalities
on society. The goods typically deemed to be excisable (tobacco, alcohol, petroleum products,
and motor vehicles) are few and usually inelastic in demand. A good excise system is invariably
one that generates revenue (as a by-product) from a narrow base and with relatively low
administrative costs.
1.1.3 COMPOSITION OF TAXES IN ZIMBABWE
The main source of revenue include taxes on income and profits for both individuals and
corporates; taxes on goods and services in the form of value added tax, customs duty and excise
duty; revenue from Investments and properties, that is, interest and dividends; international aid
and grants, and miscellaneous taxes in the form of stamp duties, fees, estate duties and business
licenses. This is in detail in Figure 1 below:
Figure 1: Domestic Tax Revenue Contribution
Source: Regional Integration in Southern Africa, Vol.6, p.38.
Individual taxes formed the greater part of tax revenue (37.9%), this is mainly because it is very
difficult to evade income taxation and it is well recorded. The other major contributor being
value added tax (29.1%) with excise duty (2.9%) contributing a smaller percentage of revenue
showing that the bulk of tax revenue is from individuals and companies. The probable reason is
8
that individual and company taxes are easier to collect than other forms of taxes and this is in
line with the tax handle theory to be discussed in literature.
1.1.4 SEMI-AUTONOMOUS REVENUE AUTHORITIES
Historically, ministries of finance have existed to collect and manage government revenues.
They rarely have a complete monopoly over collection (Fjeldstad and Moore, 2008:2). The
creation of Semi Autonomous Revenue Authorities (ARAs) has improved relationships between
tax authorities and larger corporate taxpayers, and increased, at least marginally, the capacity of
governments to raise revenue. In the last two decades, there appears to have been a trend among
developing countries towards the creation of ARAs to replace their existing tax collection
agencies (Manasan, 2003:1). In many of these countries, the radical reform of the tax agency was
primarily intended to improve revenue performance in the face of deep-seated problems in tax
administration. Tax experts (e.g., Silvani and Baer 1997 and Jenkins 1994) have suggested the
imperative for radical changes in tax administration in countries where the tax gap is large (i.e.
40% or more). In the eyes of a few academics and external observers, the introduction of revenue
agencies has been seen as a step on the road to privatisation of the revenue collection process
(Kiser and Sacks 2007; Devas et al. 2001; Byrne 1995). Despite the rhetoric and debate about
‘autonomy’, there has been very little loosening of the political and bureaucratic grip of central
executive authorities over the revenue collectors. Presidents and Ministers of Finance are still
very much in control. President Museveni in 2000, described the Uganda Revenue Authority as a
‘den of thieves’ (Therkildsen, 2004:82).
In Zimbabwe, for instance the Zimbabwe Revenue Authority (ZIMRA) came into operation on 1
September 2001 to take over dealings in taxation transactions from the Ministry of Finance. Its
mission was to facilitate economic development, trade and travel, revenue generation and
collection, to enforce compliance with revenue laws and enforce regulatory controls with
integrity, transparency and fairness (Saruchera, 2009:3). However the success of the ZIMRA in
improving tax performance did not come about due to several reasons. The organization was set
in a period of economic crisis therefore it did not receive full attention from relevant authorities
and also the underground economy was heavily growing hence hindering tax collection. There
were manpower shortages due to brain drain as revenue officers were moving out of the country
9
in search of greener pastures and this affected revenue collection as training of new staff is
expensive. Increased bribery and corruption was another problem such that due to economic
hardships tax payers were paying the officers privately so as not to face full tax charges
(Chiminya, 2008). Smuggling of goods was a contributing factor as officials connive with traders
(revenue leakage). Also there was tax erosion due to inflation, this was due to the gap between
tax payments dates scheduled and actual days it was paid, and there were delays in debt follow
up. Tax law implementation tools have been lacking, especially to avoid smuggling of goods
through informal entry and exit points in the country borders. Such requires the assistance of
military and police personnel.
1.1.5 NATIONAL TAXABLE INCOME
Taxable income refers to the base upon which an income tax system imposes tax. Generally, it
includes some or all items of income and is reduced by expenses and other deductions. The
amounts included as income, expenses, and other deductions vary by country or system. Many
systems provide that some types of income are not taxable and some expenditures not deductible
in computing tax. Some systems base tax on taxable income of the current period, and some on
prior periods. Taxable income may refer to the income of any taxpayer, including individuals and
corporations, as well as entities that themselves do not pay tax, such as partnerships.
Most systems require that all income realized be included in taxable income. Some systems
provide tax exemption for some types of income. Many systems impose tax at different rates for
differing types (e.g., capital gains or salaries) or levels of income (e.g., graduated rates). In the
United States, gross income includes all income realized from whatever source, but excludes
particular tax exempt items, such as municipal bond interest. In 2010, the United Kingdom and
the United States both provided reduced rates of tax for capital gains and dividends.
Most systems and jurisdictions allow business taxpayers to reduce taxable income by cost of
goods or other property sold, as well as deductions for business expenses. Many systems limit
some sorts of business deductions. For example, deductions for automobile expenses are limited
in the United Kingdom and United States.
10
Some systems allow tax deductions for certain non-business expenses. Such deductions may
include personal expense items, such as a home mortgage interest deduction, and vary widely by
jurisdiction. In addition, many systems allow deductions for personal allowances or a minimum
deemed amount of personal deductions. The United States Federal system allows a deduction for
personal exemptions, as well as a minimum standard deduction in lieu of other personal
deductions. Some states in the United States allow few personal deductions.
1.1.6 EFFICIENCY OF ZIMRA IN TAX COLLECTION
The Zimbabwe Revenue Authority is responsible for the collection of taxes on behalf of the
Ministry of Finance (MOF). The MOF set some targets for ZIMRA on the level of income they
should raise annually by implementing the relevant tax statutes. Hence, it is the duty for ZIMRA
to apply all its effort and skills in order to meet the targets. The set targets however are based on
an economic formula that looks at the potential of the economy to be taxed to such a level and
also incorporating the increasing need for government spending. The Table 1 below shows how
efficient ZIMRA is in relation to the MOF targets.
Table 1: Revenue Collections by ZIMRA against Ministry of Finance Target (2001-2011).
Year Target Collections % Collections Variance
2001 ZWD 132,205,200.00 ZWD 131,095,186.000 99% -1%
2002 ZWD 240,867,703 ZWD 286,080,498 119% 19%
2003 ZWD 1,147,150,430 ZWD 1,340,263,640 117% 17%
2004 ZWD 7,227,342,110 ZWD 7,870,044,779 109% 9%
2005 ZWD 24,190,773,325 ZWD 32,071,228,846 133% 33%
2006 ZWD 317,590,000,000 ZWD 406,677,663,936 128% 28%
2007 ZWD 30,026,802,809,379 ZWD 89,051,653,471,682 297% 197%
2008 ZWD 1,291,792,326,598,340,000 ZWD 14,465,620,196,460,000,000.000 1120% 1020%
2009 USD 1,051,489,093 USD 988,478,184 94% -6%
2010 USD 1,919,333,105 USD 2,238,240,231.58 115% 15%
Source: ZIMSTATS 2011.
From Table 1 above, it can be merely concluded that ZIMRA is efficient in collecting taxes as
evidenced by surpassing the MOF targets. It is only in 2001 and 2009 that ZIMRA failed to
11
meet MOF targets, with 1% and 6% deviations consecutively. Some incentives3 are given to
ZIMRA in order for it to work very hard to meet the target.
Tax performance can be presented as a percentage, that is, revenue collections are expressed as a
percentage of total national income. This percentage is known as tax ratio, and is a common
measure of efficiency of a tax system or tax performance of a country. Table 2 (next page) shows
the tax performance over 2002 to 2010 period, with the average lying below 35% (eliminating
2008 for analysis)4. The average, however is lower than that of developed nations (38.4), despite
the fact that Zimbabwe just like other developing nations relies on tax revenue for public
spending.
Table 2 : Collections as a Percentage of GDP. Year GDP-ZIMSTATS Collections % Performance
2002 Z$1,698,180,000.00 Z$286,080,498.00 17%
2003 Z$ 5,518,757,000.00 Z$1,340,263,640.00 24%
2004 Z$ 24,655,000,000.00 Z$7,870,044,779.06 32%
2005 Z$92,000,000,000.00 Z$32,071,228,846.00 35%
2006 Z$1,030,000,000,000.00 Z$406,677,663,936.00 39%
2007 Z$250,000,000,000,000.00 Z$89,051,653,471,689.00 36%
2008 Z$1,451,922,797,628,780.00 Z$14,465,620,196,460,000,000.00 996 308%
2009 US$5,600,000,000.00 USD988,478,183.97 18%
2010 US$6,715,000,000.00 USD2,214,514,806.53 33%
Source: ZIMSTATS 2011.
Graphical analysis of the tax revenue collections as a percentage of national income is presented
in Figure 2 below. A graphical analysis clearly shows the trend of performance and fluctuations
over the period. It also helps in forecasting future performance assuming everything remains
constant. For year 2008, a downward interpolation has been used to determine the real value of
tax collections.
3 Incentives are in form of increased salaries and/or bonus to workers. This has been the norm over the years. 4 2008 was a period of national crisis, which have seen Zimbabwe experiencing hyperinflation environment.
12
Figure 2: Tax Performance as a percentage of GDP.
Figure 2 clearly shows that the tax performance have been improving over the years from 2002
up to 2006, then it started falling sharply till 2009, when it then rose sharply. The peak
performance was seen in 2006. However, the performance issue really need to be addressed to
avoid such fluctuations.
1.2 PROBLEM STATEMENT
Poorer countries collect on average only two-thirds or less of the amount of tax revenue that
richer countries do, as a fraction of GDP5, yet, given the severe needs for investments in say
infrastructure and education. While the personal income tax is the dominant source of tax
revenue among richer countries, it is only a minor source of revenue among the poorest
countries.
Volatility in Zimbabwe Revenue Authority efficiency in collecting revenue (versus Ministry
Target). The performance of ZIMRA over Ministry targets cannot be forecasted, as each year has
its own level of performance and hence the conclusion that the organisation is efficient cannot be
5 Developed world have various sources of income for public spending, for example their parastatals are efficient and hence are profit making.
13
concluded. Either the Ministry formula is biased or is based on inaccurate information about the
capacity of the economy. The variance is presented in Table 3 below.
Table 3: ZIMRA Efficiency Vs MOF Target
Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Variance -1% 19% 17% 9% 33% 28% 197% 1020% -6% 15% Source: ZIMSTATS 2011.
Table 3 above clearly shows that there is no relationship of the variability in performance over
the period under study. The variability is too oscillating, and hence efficiency conclusion cannot
be made.
Despite the reliability in tax revenue as a major source of income, the tax ratio remains lower in
Zimbabwe. This is supported by tax elasticity that is less than unity. Also to note is that the
national income is under defined (understated in official statistics). Tax rates are high in
Zimbabwe, and this is witnessed by continuous cry by corporate and individuals in the formal
industry. Some sectors are overtaxed. The existence of revenue leakages in the economy
especially from the import and export sectors implies the tax laws and systems are failing to
address tax avoidance and tax evasion issues.
1.3 RESEARCH OBJECTIVES
The research objectives of the study are as follows;
• To calculate Tax Elasticity and Buoyancy of the tax system.
• To comment on Elasticity and Buoyancy of the tax system.
• To determine and explain the link between GDP and tax revenue over the years.
• To determine if the definition of income is well implemented and sort for ways to
implement tax laws on income.
• To determine tax base broadening methods.
1.4 RESEARCH QUESTIONS
The research questions of the study can be stated as follows;
• Is the Zimbabwe Tax System responsive to national income changes?
• How efficient is the Zimbabwean Tax System?
14
• What is the level of tax performance in Zimbabwe?
• Why is the taxable income understated?
• Is the Zimbabwe Revenue Authority really efficient in collecting taxes?
• Is the Zimbabwe Revenue Authority really efficient in implementing tax laws?
1.5 RESEARCH METHODOLOGY
The study will utilise secondary quantitative data to empirically analyse the tax performance and
tax efficiency of the Zimbabwean Tax System and also to analyse the relationship between
national income and tax performance level in the country. Calculation of tax elasticity and tax
ratios will be done using appropriate methods for analysis purposes. A Trend Analysis will also
be utilised to explain the behaviour of variables over the years, in order to determine the
underlying factors for such trends. Statistical regression will also be done using the Stata
(version 10) Econometric software, with possible data transformation and tests, to maximise
efficient and unbiased estimates for policy conclusion. The research methodology will help us
answer the research questions and guide us on ways to solve the underlying research problems
discussed above.
1.6 DATA COLLECTION TECHNIQUES
Quantitative data will be utilised and collected from various government publications, ZIMRA
News bulletins, and Computerised data bases (ZIMSTATS, World Bank and IMF publications).
Quantitative data is data already collected by reliable statistical departments and is ready for use.
Data will be collected as from 2000 to 2010, which is a period enough for some policy
conclusion and suggestions. Also the data will be organised in the manner which suits an
explanation to be raised.6 While some data has been collected in mixed currencies, the data used
for regressions has been restricted to United States Dollars for uniformity and international
comparisons.7 In comparison with the Zimbabwean Dollar8, the United States Dollar is more
stable and ensures real economic value to be used for policy analysis.
6 This includes tables, line graphs and bar graphs. 7 The United States Dollars has been used as many national data for international publication are expressed in the currency. 8 The Zimbabwean Dollar disappeared in 2009 due to recession in the economy which forced the currency to be substituted by other multiple stable currencies.
15
1.7 SIGNIFICANCE OF THE STUDY
The study is of relevance as it seeks to address the major constraints to the implementation of
income tax laws, determine the level at which tax collection can be emphasized, and how
fairness should be applied across sectors and individual tax payers, and how the efficiency of
ZIMRA can be utilised to raise more revenue for the economy. In summary, the study is of help
to ZIMRA as an organisation (addressing bottlenecks) and to the nation at large (ensuring
continuous supply of public goods).
1.8 LIMITATIONS OF THE STUDY
The study is done over a short period of time. This may cause some aspects and concepts
necessary for analysis to be omitted or under investigated. However the study has tried its best to
capture relevant concept to answer research questions in order to address problem of the study. It
was worthy to analyse individual tax , but individual tax data was difficult to get and its
individual analysis will demand more time. Hence the study used the overall analysis of
combined statistics.
1.9 OUTLINE OF THE STUDY
In the first chapter an introduction and the background of the study are well presented.
Theoretical and empirical literature review of tax performance is done in the second chapter.
Literature of tax structure, tax performance and tax efficiency will be presented. The focus of the
third chapter is to outline the methodology that is going to be used in the study in examining the
tax system performance as well as ZIMRA efficiency. The fourth chapter presents a discussion
and assessment of the estimation procedure and the interpretation of results found. And finally,
the fifth chapter is for conclusion of study and policy recommendations.
16
CHAPTER TWO
LITERATURE REVIEW
2.0 INTRODUCTION
Chapter Two reviews both theoretical and empirical literature. The literature review will help us
answer the research questions and in determining the best model to use for better results. The
literature review will cover cases for developing nations and developed nations as well, for
comparative purposes and possible inefficiency analysis.
2.1 THE0RETICAL LITERATURE REVIEW
The normative bent of the literature on tax policy deals with the questions of why a country
develops a particular tax structure and why this tax structure differs among countries and
changes during the process of economic growth, Chiminya (2008). This strand of tax literature
not only recognizes the importance of administrative constraints on tax policy, but in contrast to
the normative literature places administrative factors at the forefront.
The "tax handle" theory offers a sweeping historical explanation of tax structure change, Tanzi
(2001). It argues that low-income economies are forced to collect revenue from easy-to-
administer taxes (or tax handles), but that this administrative constraint lessens as countries
develop and become able to choose "better" taxes as defined by the normative objectives
discussed above. Measures of tax handles typically include per capita income, trade taxes and the
proportion of people living in urban areas (Liebaman, 2003). Although economists differ on the
recipe for a "better" tax structure, there would be general agreement that broadly based income
or consumption taxes are preferable to a reliance on foreign trade taxes, and historical evidence
suggests such a shift. In any case, high-income economies have a certain freedom to manoeuvre
in choosing tax systems, whereas low-income economies are in large part constrained by
administrative considerations.
In accordance with the tax handle theory, the effective tax structure of developing countries is
characterized by reliance on narrow tax bases, reflecting administrative convenience.
17
Considering import duties and export duties, the centralization of taxable goods in a port leads to
ease of administration. For excises, production of goods is concentrated in a few factories. For
the personal income tax, withholding of taxes on wages paid by large enterprises and
government is the meaning of administrative convenience. However, corporate income tax may
be inherently more difficult to administer because the base of net profits requires more
sophisticated accounting measures such as depreciation. In this case administrative convenience
may take the form of simply accepting, with only perfunctory audit that presents no serious
challenge, a "reasonable" amount of taxation as defined by the firm. If firms are unwilling to
contribute a reasonable sum, governments may then adopt simple rules of thumb, such as using a
percentage of gross sales to replace the concept of net profit. Musgrave (1984), argues that tax
structure is shaped by economic factors which account for the size of different tax bases and by
political and social factors which influence opinions on tax equity. Government centralization is
favourable for direct taxes on income and wealth because of its administrative advantages in
assessing these taxes.
The optimal tax theory, the reigning normative approach to taxation combines information on a
country’s economic structure, the set of available taxes to the government and the objectives of
tax policy to make recommendations on tax mix, structure and incidence (see Slemrod, 1990;
Burgess and Stern, 1993). Optimal taxes are those that raise a desired amount of revenue with the
lowest marginal efficient cost, with few distortions and that promote the desired amount of
wealth. While optimal tax theory tackles the trade off of different taxes, it does not explain the
structure of government revenues. The standard optimal tax theory assumes that individuals and
firms voluntarily pay their tax liability. This assumption is inaccurate since individuals pursue
many illegal avenues to reduce their payments such as underreporting incomes, hence there is
evidence in many countries that tax evasion is extensive.
2.2 EMPIRICAL LITERATURE REVIEW
According to Duff (2008), a concept of income serves a valuable role in tax law and policy, as a
touchstone against which existing tax rules may be assessed and tax reforms may be judged, as a
benchmark against which departures may be identified and evaluated, and as an interpretive
guide for judicial decisions in difficult cases. As a normative ideal, a concept of income should
18
reflect an ethically appealing conception of tax fairness or distributive justice that supports not
only the concept itself but the taxation of income more generally. As a guide to legislative
reform and judicial interpretation, a concept of income should also promote specific results that
are consistent with what John Rawls (1971) calls our considered convictions or judgments about
what is fair or just.
In North America, the so-called “Haig-Simons” definition of income has been the dominant
concept of income since at least the 1960s, Borris (1967). Named after U.S. economists Robert
Haig and Henry Simons (each of whom advanced distinct but similar definitions of income in the
1920s and 1930s), this concept defines income as “the money value of the net accretion to one’s
economic position between two points of time” (Haig), or as the sum of consumption and
accumulation (Simons).
Surrey (1985), explained that in the United States, the definition has been central to the concept
of tax expenditures, and influenced base-broadening efforts such as the Tax Reform Act of 1986.
Eugene (1986), said something about Canada, the Haig-Simons definition was the intellectual
inspiration for the Royal Commission on Taxation (Carter Commission), which favoured a
“comprehensive tax base” defined as “the sum of the market value of goods and services
consumed or given away in a taxation year by the tax unit, plus the annual change in the market
value of the assets held by the unit.” In both countries, tax scholars routinely refer to the Haig-
Simons definition as the normative standard for income taxation – not only to evaluate existing
income tax rules and advocate specific reforms, but also to criticize the taxation of income and
advocate alternatives like consumption taxation.
According to Hicks (1939), the purpose of income calculations in practical affairs is to give
people an indication of the amount which they can consume without impoverishing themselves.
Following out this idea, it would seem that we ought to define a man's income as the maximum
value which he can consume during a week, and still expect to be as well off at the end of the
week as he was at the beginning. Thus, when a person saves, he plans to be better off in the
future; when he lives beyond his income, he plans to be worse off. Remembering that the
practical purpose of income is to serve as a guide for prudent conduct, I think it is fairly clear
19
that this is what the central meaning must be.The central meaning of income is also subjective
for him in the sense that it is formulated in terms of the individual's expectations.
Keynes (1964) observed in his own chapter on the definition of income in the General Theory : It
will be seen that our definition of net income comes very close to Marshall's definition of
income, when he decided to take refuge in the practices of the Income Tax Commissioners and–
broadly speaking–to regard as income whatever they say, with their experience, choose to treat it
as such. For the fabric of their decisions can be regarded as the result of the most careful and
extensive investigation which is available, to interpret what, in practice, it is usual to treat as net
income.
According to McIntyre (1984), commentators traditionally have formulated the base of their ideal
tax by reference to the uses of income (consumption and savings), not to the sources of income
(wages, dividends, capital gains, etc.). The author suggested that in order to design an operating
tax system, tax specialists must convert a base specified in terms of uses of income into one
specified in terms of sources of income.
Muriithi and Moyi (2000) applied the concepts of tax buoyancy and elasticity to determine
whether the tax reforms in Kenya achieved the objective of creating tax policies that made yield
of individual taxes responsive to changes in national income. They used the proportional
adjustment method to estimate the responsiveness of tax yields on income. The results showed
that tax reforms had a positive impact on the overall tax structure and on individual tax handles.
The study concluded that despite the positive impact, the reforms failed to make value added tax
(VAT) responsive to changes in income. However, VAT had been around for about eleven years
only and subjecting it alone in a regression model did not make statistical sense.
A study by Osoro (1993) examined the revenue productivity implications of tax reforms in
Tanzania. In the study, the tax buoyancy was estimated using the double log form equation and
tax revenue elasticity using the proportional adjustment method. The argument for using the
method was that a series of discretionary changes had taken place during the sample period
1979-89, making the use of dummy variable technique impossible to apply (Osoro, 1993:14). For
20
the study, the overall elasticity was 0.76 with a buoyancy of 1.06. The conclusion was that tax
reforms in Tanzania had failed to raise tax revenues. The reasons were that government granted
numerous tax exemptions in conjunction with poor tax administration.
Tax buoyancy has been estimated using the proportional adjustment method in a study by
Chipeta (1998). He evaluated the effects of tax reforms on tax yields in Malawi for the period
1970-94. The results revealed a buoyancy of 0.95 and an elasticity of 0.6. The study concluded
that the tax bases had grown less rapidly than GDP. Kusi (1998) studied tax reform and revenue
productivity of Ghana from 1970 to 1993. Results showed a pre-reform buoyancy of 0.72 and
elasticity of 0.71 for the period 1970-82. The period after reform (1983-93), showed increased
buoyancy of 1.29 and elasticity of 1.22. The study concluded that reforms had contributed
significantly to tax performance.
A study carried out by Teera (2000) found that the results of the dynamic measure of tax
performance (tax buoyancy) indicate that the high-income OECD group has the least percentage
number of countries with a buoyancy ratio below unity, followed by the lower middle-income
group. This implies that the lower income groups have made less effort to increase tax revenue
over the period as compared to the higher income groups.
2.3 CONCLUSION
The chapter put forward both theoretical and empirical literature on definition of taxable income,
tax buoyancy and tax elasticity. The review enables the research models to be identified and be
applied to answer the research questions. The next chapter focus on the methodology to be used
for the study.
21
CHAPTER THREE
RESEARCH METHODOLOGY
3.0 INTRODUCTION
The main objective of this chapter is to discuss the econometric model to be applied in this study.
Specifically, it encompasses the model to be adopted, definition of variables, their proxies,
estimation techniques, data types, data collection procedures and sources, research instruments
and data analysis and presentation techniques.
3.1 RESEARCH DESIGN
Tanzi and Zee (2001), “An alternative, statistically based approach to assessing whether the
overall tax level in a developing country is appropriate consists of comparing the tax level in a
specific country to the average tax burden of a representative group of both developing and
industrial countries, taking into account some of these countries' similarities and dissimilarities.
This comparison indicates only whether the country's tax level, relative to other countries and
taking into account various characteristics, is above or below the average. This statistical
approach has no theoretical basis and does not indicate the "optimal" tax level for any country.
The most recent data show that the tax level in major industrialized countries (members of the
Organization for Economic Cooperation and Development or OECD) is about double the tax
level in a representative sample of developing countries (38 percent of GDP compared with 18
percent).”
Not undermining the approach suggested by Tanzi and Zee (2001), the current study will utilise
the Elasticity and Buoyancy Approach in assessing the efficiency of ZIMRA in collecting taxes,
implementation of tax laws and also in assessing the overall tax level as compared to the
potential and actual national income. Common measures of the ability of the tax system to
mobilize revenues are buoyancy and elasticity (Asher 1989).
22
Tax buoyancy measures the total response of tax revenue to changes in national income (Begum,
2007). Year to year buoyancy measures the volatility of the tax and the ability of government to
meet the demands of their constituents. As an economy grows, income of taxpayers grows and
the demand for public services tends to increase. If tax revenues grow less quickly than the
economy, then the public sector will not be able to meet increased demand for better social
amenities. Low tax buoyancy suggests that governments may face increased public pressure for
better and/or more services but with slower growing revenue sources.
Tax elasticity is defined just like tax buoyancy, but there is a crucial difference, which is that
revenue is calculated as it would have been if there had not been any change in the tax laws,
including the tax rates or bases. Thus the tax elasticity is a hypothetical construct. It tries to
reconstruct what would have happened if there had been no changes in the tax rules - i.e. what
tax revenue would have been if last year’s laws continued to apply this year.
3.2 DATA TYPES
The study will be based on secondary data for analysis. Secondary data is data collected by
someone other than the user. According to Forestry Commission (2004), Secondary Data is
existing information that has been gathered for some purpose outside the planning process.
Common sources of secondary data include censuses, surveys, organizational records and data
collected through qualitative methodologies or qualitative research. Primary data, by contrast, are
collected by the investigator conducting the research. External data are gathered by other
organisations either for their own use or for commercial use. General sources of external data
are, for instance, various computerised databases, associations, other government agencies and
different published sources such as libraries and newspapers.
Secondary data analysis saves time that would otherwise be spent collecting data and,
particularly in the case of quantitative data, provides larger and higher-quality databases than
would be unfeasible for any individual researcher to collect on their own. In addition to that,
analysts of social and economic change consider secondary data essential, since it is impossible
to conduct a new survey that can adequately capture past change and developments.
23
A clear benefit of using secondary data is that much of the background work needed has been
already carried out. This wealth of background work means that secondary data generally have a
pre-established degree of validity and reliability which need not be re-examined by the
researcher who is re-using such data.
3.3 EMPIRICAL MODEL
The traditional model used to estimate tax buoyancy requires GDP to be a determinant of tax
revenue. Several studies (Wawire, 2000; Ariyo, 1997; Quazi, 1994; Osoro, 1993) of tax
buoyancy have used the following model:
Where; T – tax revenue, Y- income (GDP), - constant term, - buoyancy coefficient, −
natural number.
The double-log version of the above equation is estimated using ordinary least squares (OLS).
This model works for periodic buoyancy, that is the average for the period under study. Annual
tax buoyancy will also be calculated using the following formula:
Tax elasticity will be estimated using the Proportional Adjustment Method. This has been
suggested by Sahota (1961) and Prest (1962) and was later described by Mansfield (1972) and
used by Omoruyi (1983), Osoro (1993) and Ariyo (1997). The method involves isolating the data
on discretionary revenue changes based on data provided by government. The resulting data
reflect only what the collections would have been if the base year structure had been in force
throughout the sample period (Osoro, 1993:13). The adjusted data is then used to estimate the
following equation;
Where provides an estimate of the income elasticity of the tax.
24
3.4 DATA COLLECTION PROCEDURES AND SOURCES
Data on national income (GDP), total tax revenue, total income taxes and other relevant data for
the study will be mainly secondary data. The data will be collected from various reputable
sources namely the ZIMRA Database, World Bank Database, IMF Publications and other
publications. Due to time the time frame of the study, data published on the internet will be used
and the sources will be used to complement each other and to confirm conformity. International
publications like the IMF and World Bank are used as they have variables data in currencies for
international comparisons, that is, in United States Dollars. Uniformity in currency ensures
appropriate regressions, graphics and comparability over the years.
3.5 DATA ANALYSIS AND PRESENTATION TECHNIQUES
Data analysis will be in form of tables, graphs (both bar graphs and line graphs) and regressions.
Regressions will be done using the Stata (version 10) Statistical software, which is the current
prevailing software. Stata is user friendly and command sensitive, which makes it most preferred
in this study.
Basic statistical tests will be carried out, that is, checking for collinearity, heteroskedasticity and
multicollinearity. Data transformation will be necessary for this study, that is, converting data to
its log linear format for regression analysis of tax elasticity. The regression model will be tested
using the rule of thumb (5% Confidence Interval).
3.6 CONCLUSION
This chapter has outlined the methodology, estimation procedures and data analysis methods to
be employed in the next chapter. The next chapter concentrates on estimation and interpretation
of results as well as graphical analysis.
25
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.0 INTRODUCTION
This chapter focuses on explaining data tables and graphs, analysing trends and estimation of the
statistical. The chapter will present summary statistics, results of relevant test undertaken in the
study and final results to be used to conclude the study.
4.1 TAX RATIO
Figure 3: Tax Ratio (2000-2010)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2002 2003 2004 2005 2006 2007 2008 2009 2010
Tax Ratio
Tax Ratio
Source: ZIMRA News Bulletin, 2011.
The tax ratio generally measures the tax efficiency, it is the ratio of total tax revenue collected
over the national income. The tax ratio has been rising constantly from 2002 to 2006 showing
improvement in tax collection and tax law implementation, and then it falls gently to 2009,
26
where it then rises again. Though there was an increase in the tax ratio, it then remains that tax
ratios are lower in developing nations than in developing nations where it averages 38 per cent.
4.2 AVERAGE TAX BUOYANCY (REGRESSION)
An average tax buoyancy of 0.756 has been obtained after running the regression equation of
total tax revenue against the national income. This magnitude implies that the tax system is
generally less responsive to changes in national income for the period under study. This poses
that the tax system in Zimbabwe is not efficient and policy makers should device certain policies
that ensures efficiency in revenue collection. It also shows that ZIMRA, which is responsible for
collecting revenue and enforcing tax laws is failing to collect tax revue to the maximum possible
level. However, the use of averages over such a period may not give proper results but just
signifies the possible happenings in the tax system.
The average buoyancy result is not different from what Kusi (1998) obtained for Ghana for the
pre-reform period. Kusi (1998) obtained a tax buoyancy magnitude of 0.72, concluding that
before reforms the tax system in Ghana has been less responsive and hence inefficient. However,
after reforms the Ghana tax system recorded a buoyancy of 1.29, and this shows that reforms had
contributed significantly to tax performance.
The Divisia index methodology has been used by Milambo (2001) to study the revenue
productivity of the Zambian tax structure for the period 1981 to 1999. The results showed
elasticity of 1.15 and buoyancy of 2.0, which confirmed that the tax reforms had improved the
revenue productivity of the overall system. However, these results were not reliable because time
trends were used as proxies for discretionary changes.
Using this average buoyancy method, the Zimbabwean tax system has not changed much even
though there has been some reforms undertaken by government on tax issues. It then remains
that, either better policies are to be implemented or proper implementation of current policies is
to be done. Inefficiency remains to be addressed as it has been pointed that GDP statistics in the
national accounts is underestimated just because of lack of capacity to define income for tax
purposes, for example, income from the informal sector remains hard to define and measure.
27
4.3 ANNUAL TAX BUOYANCY
Annual Tax buoyancy which has been calculated as the responsiveness of tax revenue to changes
in national income is presented below. A period before the formation of ZIMRA has been
included just for basic comparison purposes.
Table 4: Annual Tax Buoyancy For Period 2000 – 2010.
YEAR 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
TAX
BUOYANCY
0.491 0.475 0.695 0.696 0.974 0.969 0.872 0.712 0.954 0.911 0.843
From Table 4 above it can be noticed that the level of tax buoyancy has been below unitary for
the period under study. It can be concluded that the set up of the ZIMRA in September 2001,
managed to raise tax performance slightly but not to acceptable levels of efficiency. The peak
level of buoyancy was reached in 2004, at a level of 0.974.
Graphical analysis helps us identifying the general trend and it aids forecasting. Annual tax
buoyancy trend can be represented graphically in Figure 4 as follows.
Figure 4: Annual Tax Buoyancy for Period 2000 – 2010.
From Figure 4 above it can be seen that annual tax buoyancy has been slowly rising from 2000
reaching peak in 2004, it thereafter slightly maintains in 2005, and then started falling till 2007
28
when it slowly rises again but not as much higher any longer. Generally inefficiency has been
proved as for the whole period tax buoyancy has been below unitary. This implies that the tax
system is less responsive to changes in national income.
4.4 TAX ELASTICITY
Using the Proportional Adjustment Method, the regression coefficient representing tax elasticity,
has been found to be of magnitude 0.6784. This shows that the tax system is inelastic. Given that
tax policy has not been changing much, such a magnitude denotes inefficiency. The magnitude
shows that there is a gap between policy release and policy implementation. Such gaps/lags may
be caused by either the MOF delaying passing of policy to ZIMRA or failure of the Authority to
adjust and apply the policy/tax law. In some cases policy rejection by clients may be
experienced.
Regression results are presented in Table 5 below and discussion of regression results follows
thereafter.
Table 5: Ordinary Least Squares Regression (Proportional Adjustment Method)
Dependent Variable: Natural log Tax Revenue
Coefficient Value t-statistic Probability
Elasticity (B) 0.6784 6.26 0.000***
Constant 12762.112 2.71 0.024**
F( 1, 9) = 39.21 Prob > F = 0.0001***
R-squared = 0.8133 Adj R-squared = 0.7926
**Denotes statistical significance at 5%, *** at 1%.
The F statistic 39.21 (0.0001***) shows that the model is correctly specified and that the null
hypothesis of variable inclusion is rejected at the 1% level of significance and we therefore
conclude that the model is correctly specified.
The estimated model also shows an Adjusted R-squared of 0.7926, which is a reasonable
magnitude. It shows that about 80% variation in tax revenue is explained by fluctuations in the
national income (GDP). This just leaves a few more factors to affect tax revenue levels.
29
The coefficient of changes in national income (which is termed elasticity in this case) is of
magnitude 0.6784 and is significant at 1% level. The economic meaning for the coefficient is
that when national income changes by a dollar, tax revenue also changes by about 67.84 cents.
This definitely shows that the tax system in Zimbabwe is not responsive to changes in national
income. A study of the Tanzanian tax system by Osoro (1993) also obtained elasticity of 0.76,
and the conclusion was that tax reforms have failed to raise adequate tax revenue for the country.
Tax elasticity has been estimated using the proportional adjustment method in a study by Chipeta
(1998). He evaluated the effects of tax reforms on tax yields in Malawi for the period 1970-94.
The results revealed a tax elasticity of 0.6. The study concluded that the tax bases had grown less
rapidly than GDP.
Differing results have been obtained in Ghana, where elasticity was above unitary. Kusi (1998)
studied tax reform and revenue productivity of Ghana from 1970 to 1993. Results showed a pre-
reform elasticity of 0.71 for the period 1970-82. The period after reform (1983-93), showed
increased buoyancy elasticity of 1.22. The study concluded that reforms had contributed
significantly to tax performance.
4.5 CONCLUSION
In this chapter we have calculated, estimated and interpreted regression results in an effort to
determine the tax performance, tax law implementation levels and ability to capture income for
tax purposes for the Zimbabwean economy. The analysis has been done through analyzing the
ZIMRA efficiency levels, as it is the one in charge of implementing tax laws and collecting
revenue from relevant sources. The measures of tax performance, namely buoyancy and
elasticity, indicated poor performance of the tax system. These findings are the basis for policy
prescriptions to be outlined in the next chapter.
30
CHAPTER FIVE
RECOMMENDATIONS AND CONCLUSION
5.0 INTRODUCTION
This chapter contains a detailed conclusion to the study and also some policy lessons drawn from
the empirical results of the previous chapter.
5.1 CONCLUSION
The study has attempted to examine the level of tax performance for the tax system in Zimbabwe
using measures of tax performance namely elasticity and buoyancy. It has been found that the tax
system in Zimbabwe is less responsive to national income changes, implying that the relevant tax
collection tools and policies are failing to utilise increase in national income.
A trend analysis has been used to identify the annual efficiency levels of the tax system. The
trend has shown that for the period under4 study, not even a in a single year has the tax system
performed to acceptable levels. Comparison has been made with other countries, and this shows
improvement in tax performance where reforms have been undertaken, Zambia and Ghana have
managed to show buoyancy levels that are above unitary for post-reform periods. Constant tax
reforms in Zimbabwe showed slight improvements, but however in the inefficient quadrant.
Although ZIMRA has proved to be efficient in collecting tax revenue through surpassing the
Ministry of finance target, the study managed to show that the level at which it is operating is not
the possible level, actually it is below potential level of the economy. This is mainly caused by
both internal and external factors. Factors like policy implementation gaps, staff shortages,
corruption and implementation tools have been cited as undermining the performance of the
Authority.
31
A tax ratio has been used as a complimentary tool in analysing tax efficiency. The tax ratio for
each for the period under study has been calculated and low levels have been noticed. Due to the
issue of GDP in developing nations being underestimated, it has been pointed that the estimates
of the tax ratios do not correctly represent level of tax performance, rather they are overstated.
This implies that there is poor tax performance in Zimbabwe. Comparison with the developed
world has been done, of which the tax ratio for the developed world of 38.4% is greater. This
result is not expected as developing world relies on revenue from taxes more than the developed
world which has many sources for public spending sponsoring.
5.2 POLICY RECOMMENDATIONS
Since research findings suggest that the national income in understated and that developing
nations generally concentrate on collecting tax revenue from the easy-to-tax sectors, it is
recommended that there should be tax base broadening to capture income from the informal
sector and other sectors that are under-taxed. Policy makers may base their tax base broadening
using the Haig-Simons-Hicks definition of income, which tries to capture every taxable income.
Through understanding and implementing the HSH definition of income tax efficiency may be
improved.
The study indicated that ZIMRA is less efficient than it being compared to Ministry of Finance
targets. Internal and external challenges facing ZIMRA should be addressed. Adequate tax law
implementation tools should be made available, and these include adequate training, funds and
appropriate degree of autonomy to government intervention. Time lags between policy
publishing and policy implementation should be minimised.
The study also recommend for improvement in tax administration through appropriate reforms,
invest in the improvement of infrastructure to facilitate the collection of taxes and stable
macroeconomic environment. Improvement in tax administration will produce efficient taxing
systems which discourages tax evasion and the growth of the hidden economy.
32
Policy makers are encouraged to avoid policy reversals in the economy, since these has bee
common during the period under study. Relevant authorities should be supportive to tax
legislation and its implementation and avoid political interference in tax issues.
Since the study indicates that by meeting Ministry of Finance target does not guarantee that
ZIMRA is efficient in collecting tax and implementing tax laws, the Authority should seek ways
of addressing both internal and external factors that are hindering its performance. ZIMRA is on
the ground and this should help it pointing where challenges to tax law implementation are
originating. Continuous feedback to the relevant authorities is encouraged for ZIMRA. Some
required measures are adequate staff training, tax law implementation tools and incentives for
workers to reduce staff turnover.
5.3 FUTURE AREAS OF RESEARCH
The current study concentrated on overall tax system, which means that the policy suggested are
based on the general side. However if tax buoyancy and elasticity could be calculated on
individual taxes, areas of great emphasis will be better identified since there are many taxes at
hand. The major constraint of this research remains the time frame.
33
REFERENCE
Begum Lutfunnahar (2007), “A Panel Study on Tax Effort and Tax Buoyancy with Special
Reference to Bangladesh. Policy Analysis Unit(PAU). Working Paper Series: WP 0715.
Research Department, Bangladesh Bank. Bangladesh.
Break, George F. 1954. "Capital Maintenance and the Concept of Income." The Journal of
Political Economy 62:1, 48—62.
Chelliah, R.J., Baas, H.J., and Kelly, M.R. (1975), “Tax Ratios and Tax Effort in Developing
Countries, 1969-71” IMF staff Papers, Vol. 22, No. 1, March, pp.187-205.
Chiminya A. (2008). “An Empirical Analysis of the Determinants of Tax Revenue Share in
Zimbabwe(1975-2005).” MSc Thesis. University of Zimbabwe.
Choudhry, N. (1979), “The Measurement of Tax Revenue Elasticity,” IMF Staff Papers, vol. 26,
March.pp 124-187.
Choudhry, N. N. (1975), “Measuring the Elasticity of Tax Revenue: A Divisia Index Approach,”
IMF Staff Paper, vol. 36 pp 87-122.
David G. Duff (2008), “Rethinking the Concept of Income in Tax Law and Policy ”Faculty of
Law, University of Toronto.
Devas, N., Delay, S. and Hubbard, M. (2001), “Revenue Authorities: Are they the right vehicle
for improved tax administration?” Public Administration and Development, Vol. 21, pp. 211-
222.
Eisner, Robert. 1989. "Divergences of Measurement and Theory and Some Implications for
Economic Policy." The American Economic Review 79, 1, 1—13.
34
Eugene Steuerle (2004), “Contemporary U.S. Tax Policy,” Washington, D.C.: The Urban
Institute.
Haig, Robert M. 1921. "The Concept of Income-Economic and Legal Aspects." in The Federal
Income Tax, Robert M Haig, ed. New York: Columbia University Press.
Hicks, John R. 1939. Value and Capital: An Inquiry Into Some Fundamental Principles of
Economic Theory. Oxford: Clarendon Press.
Joseph M. Dodge (2001), “A Deemed Realization Approach is Superior to Carryover Basis (and
Avoids Most of the Problems of the Estate and Gift Tax” 54 Tax L. Rev.421
Kendrick, John W. 1970. "The Historical Development of National Accounts." History of
Political Economy 11:284—315.
Keynes, John M. 1964. The General Theory of Employment, Interest, and Money . San Diego:
Harcourt and Brace.
Matshediso I.B. (2004), “A review of mining tataxion in selected SADC countries and Chile.”
Botswana Journal of Technology Vol.13 No.2 pp. 41-50.
Meade, James E ,and Richard Stone. 1941. "The Construction of Tables of National Income,
Expenditure, Savings and Investment." The Economic Journal 51, 202/203:216—33.
Michael J. Graetz (1979), “Taxation of Unrealized Gains at Death – An Evaluation of the
Current Proposals,” 59 Va. L. Rev. 830.
Milambo (2001), “Tax Incidence Analysis of Developing Countries: An Alternative View,”
World Bank Economic Review, 5: 533-52.
35
Minorov Maxim (2006), “Economics of Spacemen: Tax Evasion and Firm Performance.
Evidence from Russian Banking Transaction data,” Graduate School of Business, University of
Chicago.
Muriiti M. K and Moyi (2000), “Tax Reforms and Revenue Mobilization in Kenya,” AERC
Research Paper no. 131.
Musgrave, R. A. 1985. "A Brief History of Fiscal Doctrine." in Handbook of Public Economics,
Alan J. Auerbach and Martin Feldstein, eds. New York: North-Holland.
Musgrave, R.A. and Musgrave, P.B. (1984), “Public Finance in Theory and Practice,” McGraw-
Hill, New York.
Quazi Masood Ahmed (1994), “The Determinants of Tax Buoyancy: An Experience from the
Developing Countries.” The Pakistan Development Review. 33:4 Part II (Winter 1994) pp. 1089-
1098.
Raja J., Chelliah, Hessel J. Baas, and Margaret R. Kelly, (1971), “Tax Ratios and Tax Effort in
Developing Countries,” Staff Papers, International Monetary Fund, Vol. 2, pp. 187-205.
Regional Integration in Southern Africa, 2010.
Royal Commission on Taxation, Report, (Ottawa: Queen’s Printer, 1966), Vol. 3 at 39.
Shaikh, Anwar M. and E. Ahmet Tonak. 1994. Measuring the Wealth of Nations: The Political
Economy of National Accounts. Cambridge: Cambridge University Press.
Simons, Henry C. 1938. Personal Income Taxation: The Definition of Income as a Problem of
Fiscal Policy. Chicago: Chicago University Press.
36
Smeeding, Timothy M., and Daniel H Weinberg. 2001. "Toward a Uniform Definition of
Household Income." The Review of Income and Wealth 47, 1:1—24.
Stanley S. Surrey and Paul R. McDaniel (1985), “Tax Expenditures,” Cambridge: Harvard
University Press.
Tanzi V. (1987), “Quantitative Characteristics of the Tax Systems of Developing Countires”, in
The Theory of Taxation for developing Countries, ed. By Newbery and Stern, Oxford University
Press, New York, pp. 205-241.
Tanzi V. (1992), “Structural Factors and Tax Revenue in Developing Countries: A Decade of
Evidence”, in Open Economies: Structural Adjustment and Agriculture, ed. By Goldin, I. and
Winters, A.L., Cambridge University Press, Cambridge. pp. 267-281.
Tanzi, V. and Zee Howell, H. (2000), “Tax Policy for Emerging markets: Developing
Countries,” National Tax Journal, Vol. 53, No. 2 pp. 299-322.
Tanzi, Vito, 1981, “A Statistical Evaluation of Taxation in Sub-Sharan Africa,” in Taxation in
Sub-Saharan Africa (Washington: International Monetary Fund), pp.45-50.
Usher, Dan. 1987. "Income." In The New Palgrave: A Dictionary of Economics . John Eatwell,
Murray Milgate, and Peter Newman, eds. London: Macmillan.
Wawire Nelson Were H. (2000), “The Determinants of Tax Revenue in Kenya.”Kenyatta
University, Nairobi.
World Bank Development Indicators, 2011.
Zimbabwe Statistics (ZIMSTATS) 2011.