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

Motivation

Appropriately taxing the richest is a priority for African governments, which need tax revenues to invest and pay for public services. In Uganda, the revenue authority launched a unit in 2015 to monitor the tax affairs of high-net-worth individuals (HNWIs) and very important persons (VIPs), 393 individuals in all. The unit combined persuasion, assistance, and enforcement.

Purpose

To establish the extent to which the unit was able to improve tax compliance by the rich.

Methods and approach

In collaboration with the Uganda Revenue Authority, this study builds on taxpayer-level data on tax filing and payment. The analysis employs a standard difference-in-difference framework, exploiting the timing of the launch of the unit (September 2015). It also makes use of the existence of the target group of 393 wealthy individuals and a group of another 1,731 potentially wealthy individuals who have been identified but never included in the unit's operations owing to limited resources. We match the groups using a propensity score algorithm.

Findings

The unit has been only partially successful. While the unit increased the probability of filing a return, especially by VIPs, taxpayers declared less on different measures, with no impacts on tax liability. On tax payments, only a small and significant positive impact was found, again due to complex offsetting responses across tax categories. This study also measures the spillover effect on companies controlled by the richest—again documenting complex compensating reactions and no meaningful impacts on tax take. Lastly, while deterrence is more effective for HNWIs, taxpayer assistance and public shaming are more relevant for VIPs.

Policy implications

This case shows that the rich can be identified and their tax monitored. It also shows the limits of what can be achieved. The Uganda unit lacked staff; it needed twice as many people to monitor the tax of wealthy persons adequately. Moreover, it was hamstrung by the difficulties of sharing data between different departments of the Tax Authority, among government agencies, and between government and key agents such as banks. Ultimately, the unit did not have the staff and data to challenge the tax avoidance schemes deployed by wealthy people and the companies they own.