Tax revenue potential and effort in Ethiopia: A comparative analysis of stochastic frontier analysis vs utility maximisation function as a new measure of tax effort

• Author: Fisseha, F.L.
• DOI: https://doi.org/10.47348/AMTJ/V2/i1a16
• Published date: 28 March 2022
• Date: 28 March 2022
• Citation: (2022) 2 AMTJ 307
• Pages: 307-328

https://doi.org/10.47348/AMTJ/V2/i1a16

307

TAX REVENUE POTENTIAL AND EFFORT IN ETHIOPIA:

A COMPARATIVE ANALYSIS OF STOCHASTIC FRONTIER

ANALYSIS VS UTILITY MAXIMISATION FUNCTION AS A

NEW MEASURE OF TAX EFFORT

POTENTIEL DES RECETTES FISCALES ET EFFORT EN

ETHIOPIE: UNE ANALYSE COMPARATIVE DE L’ANALYSE DE

LA FRONTIÈRE STOCHASTIQUE CONTRE LA FONCTION

DE MAXIMISATION DE L’UTILITÉ COMME NOUVELLE

MESURE DE L’EFFORT FISCAL

POTENCIAL DE RECEITAS FISCAIS E ESFORÇO NA ETIÓPIA:

UMA ANÁLISE COMPARATIVA DA ANÁLISE DA FRONTEIRA

ESTOCÁSTICA VS FUNÇÃO DE MAXIMIZAÇÃO DA

UTILIDADE COMO NOVA MEDIDA DO ESFORÇO FISCAL

Fentaw Leykun Fisseha*

JEL classif ication: H21, H25, H26

ABSTRACT

This arti cle tests the new mea sure of tax effort s following Dalama gas et al (2019) who

argued that in the c ontext of the Arrow-Debreu e conomy, with fixed la bour supply

and no savings, disp osable income is e qual to private co nsumption, a utility function

with two argum ents, income, and g overnment spending, is maxim ised concer ning

direct and indire ct tax rates. The optimal l evel of tax revenue is der ived from a utility

maximisation p rocess and is sho wn to be equal to the difference b etween income and

consumption. A s a robustness ch eck, the results of t he utility maximi sation function

were compared t o the findings of th e stochastic frontier model. Eac h model records

very near res ults for tax ef fort, tax poten tial, and tax gaps. T he empiric al findings

revealed that Et hiopia has a large tax gap an d poor tax effort, which i s primarily due

to policy choic es and enforcement procedure s.

Keywords: ineffi ciency, stochasti c frontier, tax ef fort, tax potential, utility

maximisation

RÉSUMÉ

Cet article t este la nouvelle me sure des effo rts fisca ux selon Dalama gas et al (2019)

qui ont soutenu que da ns le contexte de l ’économie d’Arrow-Debreu, ave c une offre

de travail fixe et sans épargne, le revenu disponible e st égal à la consommat ion

privée, une fonction utilitaire à de ux arguments, le revenu et les d épenses publi ques,

est maximisée c oncernan t les dépense s directes et indirectes du taux d’imposit ion.

Le niveau optim al de recettes f iscales est d érivé d’un processus de maximisatio n

* Assistant professor of accounting and finance, Bahir Dar University, Ethiopia and head

of department of project management, Amhara Leadership Academy, Bahir Dar, Ethiopia:

w.fentahun@gmail.com.

(2022) 2 AMTJ 307

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308 AFRICAN MULTIDISCIPLINARY TAX JOURNAL

https://doi.org/10.47348/AMTJ/V2/i1a16

d’utilité et est égal à la dif férence entre le revenu et la con sommation. Af in de

vérifie r la robustesse ou l’exact itude de la recherc he, les résultat s de la fonction de

maximisation d e l’utilité ont été comparé s aux résultats d u modèle de frontière

stochastique. C haque modèle enre gistre des résultats très proche s de l’effort fiscal, le

potentiel fi scal, et les écarts f iscaux. Les résult ats empiriques ont ré vélé que l’Ethiopie

a un énorme écart fiscal et un faible effor t fiscal, c e qui est princi palement dû au x

choix politiques et aux procédures d’application.

Mots-clé s : inefficacité, frontière stocha stique, effort fiscal, potentiel fiscal,

maximisation de l’utilité

RESUMO

Este artigo te sta a nova medida dos esfor ços fiscais na sequência de D alamagas et al.

(2019) que argumentaram que n o contexto da economia Arrow -Debreu, com oferta de

trabalho fixo e se m poupanças, o rendimento disponível é igual ao consu mo privado,

uma função de ut ilidade com dois argumentos, rendimento e despesas governamenta is,

é maximizada no que d iz respeito às ta xas de impostos direc tos e indirectos. O nível

máximo de rece itas fisca is é derivado de um p rocesso de maxim ização da utilidade

pública e mostra-se igu al à diferença entre rendiment o e consumo. Como verifica ção da

robustez, os resultados da f unção de maximização da utilidade foram comparados com

os resultados do modelo e stocástico de f ronteira. Cada mode lo regista resulta dos muito

próximos para o esfor ço fiscal, potenci al fiscal, e lacuna s fiscais. As conclu sões empíricas

revelaram que a Et iópia tem uma grande lacuna f iscal e um fraco esforço f iscal, o que se

deve princ ipalmente a escolhas polític as e procediment os de aplicação da lei.

Palavra s-chave: ineficiência, fronte ira estocástica, esforço fisc al, potencial

fiscal, maximização da utilidade

I INTRODUCTION

Recently, tax revenue mobilisation has become prominent in the

policy debate ( Keen et al, 2015). The donor agencies of multilateral

and bilateral nature are increasingly recognising the essential role of

taxation in ensuring sustainability and ownership in the process of

development (Mascagni, Moore & McCluskey, 2014). Countries have

implemented var ious reforms and prioritised this issue, for example,

African governments and pan-African institutions implemented severa l

important reforms in the last decade and gave taxation a higher prof ile

on the policy agenda; the African Tax Adm inistration Forum was

established in 2008 particularly to encourage South-South cooperation

amongst African tax administrations in collaboration with African

Development Bank (Ma scagni & Mengistu, 2016).

Revenue mobilisation through ta xation has attracted researchers’

interest, particularly in the area of economics and pol itical science

(Fjeldstad , 2013). The centr al question here is why taxat ion h as recently

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