The effects of personal income tax reform on employees’ taxable income in Uganda

We evaluate a major personal income tax reform in Uganda that came into effect in 2012–13. The reform increased the tax-free lower threshold, increased tax rates for higher incomes, and introduced an additional highest tax band. Using the universe of pay-as-you-earn administrative data submitted by employers in the formal sector, we analyse the impact on taxable income of the introduction of the additional top tax band. Our results indicate that the elasticity of taxable income in Uganda is larger than in previous results from developed countries. Overall, the additional revenue generated from the introduction of the additional top tax band by far offset the revenues lost from the decreased revenues from employees with medium to lower taxable incomes, despite the large elasticity of taxable income at the top. We contribute to the very scarce literature on the effects of personal income tax reform on employees’ income in a low-income country in Africa.</p

Taxpayer response to greater progressivity: Evidence from personal income tax reform in Uganda

We evaluate a major personal income tax reform in Uganda that came into effect in 2012–13, contributing to the scarce literature on the effects of personal income tax reform on employees’ income in a low-income country in Africa. The reform increased the tax-free lower threshold, increased tax rates for higher incomes, and introduced an additional highest tax band for top 1% of income earners. Using the universe of pay-as-you-earn (PAYE) administrative data from the Uganda Tax Authority, we analyse the impact of the reform on reported labour incomes. In the preferred specification, we find very limited support for behavioural reactions. However, heterogeneity analysis reveals that top-income workers in firms handled by ordinary (as opposed to medium or large taxpayer) offices report lower incomes after the reform. We also find suggestive evidence that part of the response may arise from income shifting. The reform managed to raise more revenue and it also led to a limited reduction in after-tax income inequality.nonPeerReviewe