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Africa Region Working Paper Series No. 3
Business Taxation in a Low-Revenue Economy Duanjie Chen, Ritva Reinikka June 1999 Abstract
Using the marginal effective tax rate (METR) analysis for Uganda and its neighboring countries, this study demonstrates that it is indeed possible that, even when a country's public revenue is low at the macroeconomic level, rapidly increasing taxation may pose a constraint to private investment at the microeconomic level. There are two reasons. First, while the enterprise sector in these economies is typically small, it represents a high proportion of the effective tax base. Second, access to credit is limited, particularly for smaller firms, and hence most private investment is financed by profits. As a result, taxation reduces both the expected revenue from investment projects and the liquidity to finance them. From the perspective of foreign investors, Uganda is more highly taxed than Kenya and Tanzania. Uganda's tax disadvantage results mainly from its property tax, the depreciation allowance on buildings, and its high fuel taxation. As inventories and buildings are the highest taxed assets in Uganda, industries investing heavily in them (tourism, manufacturing, communications) incur a higher METR than the other sectors. Tax administration, if not fair and efficient, can distort the best intentions of policy-makers and can in practice produce a very different tax burden than intended. Using firm survey evidence, we identify several factors that can alter a METR based on the formal tax regime, including wide-spread tax evasion, delays in the VAT refunds, arbitrary tax assessments, and bribes. full text of paper(MS Word doc, requires Word Viewer)
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