How to improve tax compliance by wealthy individuals? Evidence from Uganda

Abstract

Motivation: Appropriately taxing the richest is a priority for Africangovernments, which need tax revenues to invest and pay for publicservices. In Uganda, the revenue authority launched a unit in 2015 tomonitor the tax affairs of high-net-worth individuals (HNWIs) and veryimportant persons (VIPs), 393 individuals in all. The unit combinedpersuasion, assistance, and enforcement.Purpose: To establish the extent to which the unit was able to improvetax compliance by the rich.Methods and approach: In collaboration with the Uganda RevenueAuthority, this study builds on taxpayer-level data on tax filing andpayment. The analysis employs a standard difference- in-differenceframework, exploiting the timing of the launch of the unit (September2015). It also makes use of the existence of the target group of 393wealthy individuals and a group of another 1,731 potentially wealthyindividuals who have been identified but never included in the unit'soperations owing to limited resources. We match the groups using apropensity score algorithm.Findings: The unit has been only partially successful. While theunit increased the probability of filing a return, especially by VIPs,taxpayers declared less on different measures, with no impacts on taxliability. On tax payments, only a small and significant positive impactwas found, again due to complex offsetting responses across taxcategories. This study also measures the spillover effect on companiescontrolled by the richest—again documenting complex compensatingreactions and no meaningful impacts on tax take. Lastly, whiledeterrence is more effective for HNWIs, taxpayer assistance andpublic shaming are more relevant for VIPs.Policy implications: This case shows that the rich can be identifiedand their tax monitored. It also shows the limits of what can beachieved. The Uganda unit lacked staff; it needed twice as manypeople to monitor the tax of wealthy persons adequately. Moreover,it was hamstrung by the difficulties of sharing data between differentdepartments of the Tax Authority, among government agencies, andbetween government and key agents such as banks. Ultimately, theunit did not have the staff and data to challenge the tax avoidanceschemes deployed by wealthy people and the companies they own