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Chapter-3 Tax Design, and Tax Structure In Ethiopia

5/11/23
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After the completion of the chapter, you should be able to:

 Understand the concept of Tax levels
 Understand the concepts of Tax Structure
 Identify Tax rates or Tax systems
 3.0 Intruduction
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 There are some important similarities in the level and structure

of taxation in different countries.

 But also some differences reflecting both regional and economic

factors, such as the level of per capita income.
 3.2. Tax levels
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What is tax levels?

 The ratio of tax from the GDP of the country.
 On average, the tax ratio , taxes as a share of GDP was a bit less
than one-fifth (1/8) or (18.8 percent) of GDP for the 168 coun-
tries in the sample (Study conducted on 168 countries by Bird
and Zolt, 2003).
 Tax levels : Cont‘d
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What are the factors that affect Tax Level?

1. Opportunity affects tax level

• Rich natural resource like Venezuela and Azerbaijan = High tax ratios

2. Choice affects tax level.

 Countries like Sweden and the Netherlands = Large and centralized governments

 Countries like United States and Switzerland = Smaller and Decentralized gov-
ernments.
 Tax levels : Cont‘d
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3. Tax ratios do vary by income levels.

• Study conducted by Bird and Zolt, 2003, the countries in the sample for which
GDP data were available were divided into three groups based on per capita
GDP.
 Per capital GDP (89 countries) < USD 1,000 = Low Income, 17% tax ratio
 Per capital GDP (51 countries) USD 1,000 to USD 17,000 = Medium in-
come, 22% tax ratio
 Per capital GDP (24 countries) > USD 17,000 = High income, 27% tax ratio
 Tax levels : Cont‘d
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 Demand of public service rise as income levels increase, especially,

poor countries (lower-income countries).
 Urbanization tends to rise with income, which leads to high de-
mand for public services, at the same time, usually easier to col-
lect taxes in urbanized areas.
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Conclusion: Tax ratios in relation to income levels.

 Tax ratios rise with per capita income levels; however, the relationship between
rising income levels and higher taxes is significant only for the poorer coun-
Tax levels : Cont‘d
tries.

 As incomes rise in poor countries, the size of the public sector almost invari-
ably becomes relatively larger. After some point, however, this income determin-
ism of the tax level declines and the relationship between income and tax levels
largely disappears. As already mentioned, the rich countries have more choices,
and some rich countries have chosen to levy much lower taxes than others.
Therefore, there is weak relationship between economic development and the
level of taxation.
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 Method of taxes raise or the manner in which countries raise taxes differs as
widely as do the amounts they raise.

Why countries have differs tax structure?

1.
3.2 Tax Structure
A country economic structure and location

 Usually, Low-income group (low per capital income)= More on trade taxes
(customes duties), heavily on excise taxes on tobacoo, alchol and so on or more
revanue at border, b/c relatively few collection points need to be controlled. For
example, small island countries such as Barbados, and Djibouti

 Usually, High-income group (high per capital income) = More on Direct taxes
especialy on personal income and Consumption taxes (VAT), b/c they require a
more effective tax administration and taxpayers who are more sophisticated.
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2. History, and

3. Tax structures found in neighboring countries, and

4. Based on importance. Choice also plays a part, as different countries may also
Tax Structure : Cont’d
attach different importance to such commonly accepted characteristics of a good
tax system as fairness, economic effects and collection costs.
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 The three tax rates:

1. Proportional Tax Rate

3.3 Tax Rates or Tax Systems
2. Progressive Tax Rate, and

3. Regressive Tax Rate

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1. Proportional Tax Rate

• Called flat taxes
• Tax Rates
Different or Tax
amount forSystems : Cont’d
low and high income groups
• Same rate for Low and high income.
• High burden on high-income
• Stimulate the economy by encouraging people to spend more
and work more because there is no tax penalty for earning more.
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For example,

Tax Rates or Tax Systems: Cont’d

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2. Progressive Tax Rate

 Different amount for low and high income groups
Taxrate
 High Rates orincome
for high Tax Systems
or low rate :forCont’d
low income
 High burden on High-income
 Based on the concept of ability to pay
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For example,

Tax Rates or Tax Systems: Cont’d

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3. Regressive Tax Rate

• Opposition to a progressive tax
• Tax amount
Same Rates for
or low
TaxandSystems : Cont’d
high income groups
• Low rate for high income or high rate for low income
• High burden on low-income
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For example, In U.S. sales tax

Tax Rates or Tax Systems: Cont’d

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What is the current tax rate or system of Ethiopia?

 According to the governemnt policy, its Progressive tax rate, but
Tax Rates
practically or Tax
its both Systems
progressive : Cont’d
(Personal income tax, Business
profit tax, tax income on rental of building etc.) and proporational
(Divident tax 10%, Deposit interest tax 5%/10% etc).
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 This chapter focuses on tax design and structure in developing countries. Variety
of countries have very different tax levels and structures. While globalization
and other factors may lead to further convergence of tax systems, the evidence
suggests that the size and structure of taxation in most countries will continue to
be dominated largely by domestic rather than global factors.


Summary
Three types of tax systems: proportional taxes (require all taxpayers to pay the
same fraction of their income, regardless of how much money they earn), re-
gressive taxes (require high- income earners to pay a smaller fraction of their
income than those with a lower income), and progressive taxes (require high-
income taxpayers to pay a large fraction of their income than taxpayers with a
lower income).
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