ZIMBABWE REVENUE AUTHORITY

KURIMATRAINING SCHOOL
An Empirical Analysis Of Tax Performance and Tax Efficiency: Reference To The Concept of Income in Tax Law and Policy (Haig-Simons-Hicks Definition of Income)
BY WELLINGTON GARIKAI BONGA
EC# : 04103858 SAP#: 3116 TRAINER: Mrs FM Banda This research is submitted in partial fulfillment of the requirements of ZIMRA Kurima Training School. ZIMRA : Kurima Training School OCTOBER 2011
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DEDICATION

To my beloved wife (Elsie), mother (Beauty), brothers (Kassian, Robert, Moses) & sisters (Virginia, Ellen).

To them, I say, Thanks for your encouragement, in the better of me.

God Bless!

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ACKNOWLEDGEMENTS
First and foremost, I would like to express my sincere gratitude to my dear supervisor Mrs FM Banda for her constructive suggestions and guidance throughout the study. Without her supervision, I would have not gone this far. Mr O Chasiyeni should also be credited for introducing the subject to me during training sessions. I will extend my gratitude to Mr T Kativhu for his constructive suggestions and comments. While Mr L Tatsvareyi, is worth to be noted for his ideas and comments on the construction of the research.

Special thanks should also be given to my family members for their financial, spiritual and moral support throughout my educational successes.

I also wish to thank everyone in my March 2011 Trainee Group for their encouragement and academic help they provided during the course of the study. In Beitbridge Class I will single out Manyika Ashton, Prince Makoni, Rinomhota Nakai and Cheryl Zigora for their closest friendship and continuous concern to the success of my research. In Bulawayo Class I will mention Murongerwi Andrew, Nombeko Gumbo and Gugulethu Mpofu for constant encouragement during course of training. To them I say, Keep up this spirit of industry.

With due respect, I also acknowledge, the guidance of the Almighty, God, for taking me through this challenging time of my life. I owe everything to Him.

All views, errors, and omissions are my own and should not be attributed to any person or organisation mentioned above.

Bonga Wellington Garikai iii

ABSTRACT
Fulfilling Ministry of Finance targets in revenue collection may not define efficiency in tax collection and accurate implementation of tax laws and policy by the Zimbabwe Revenue Authority. The study recognises the challenges in defining national income in developing nations as compared to the standard definition formulated from the commonly known as the HaigSimons-Hicks definition of income. The study through the calculation of tax buoyancy and elasticity managed to identify that the revenue being collected is below the maximum possible (potential), and the efficiency of ZIMRA may be improved. Several factors have been cited including time lags between policy announcement and policy implementation, staff migration, lack of job security, lack of resources among others. The study suggest that time lags should be shortened for tax law formulation and tax law implementation, certain ways should be designed to define taxable income from the informal sector and other hard to tax sectors using the HSH definition, general tax base broadening, issues of staff shortages, implementation tools and improvement in tax administration.

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CONTENTS
DEDICATION............................................................................................................................... ii ACKNOWLEDGEMENTS ........................................................................................................ iii ABSTRACT .................................................................................................................................. iv CONTENTS................................................................................................................................... v LIST OF TABLES AND FIGURES.......................................................................................... vii LIST OF TABLES .................................................................................................................. vii LIST OF FIGURES ................................................................................................................ vii ACRONYMS .............................................................................................................................. viii CHAPTER ONE ........................................................................................................................... 1 INTRODUCTION......................................................................................................................... 1 1.0 INTRODUCTION .................................................................................................................... 1 1.1 BACKGROUND ...................................................................................................................... 3 1.1.1 TAX SYSTEM IN ZIMBABWE ........................................................................................... 3 1.1.2 TAX STRUCTURES DEVELOPING NATIONS ................................................................ 4 1.1.3 COMPOSITION OF TAXES IN ZIMBABWE ................................................................... 7 1.1.4 SEMI-AUTONOMOUS REVENUE AUTHORITIES ......................................................... 8 1.1.5 NATIONAL TAXABLE INCOME....................................................................................... 9 1.1.6 EFFICIENCY OF ZIMRA IN TAX COLLECTION .......................................................... 10 1.2 PROBLEM STATEMENT ..................................................................................................... 12 1.3 RESEARCH OBJECTIVES ................................................................................................... 13 1.4 RESEARCH QUESTIONS..................................................................................................... 13 1.5 RESEARCH METHODOLOGY ............................................................................................ 14 1.6 DATA COLLECTION TECHNIQUES ................................................................................. 14 1.7 SIGNIFICANCE OF THE STUDY ........................................................................................ 15 1.8 LIMITATIONS OF THE STUDY .......................................................................................... 15 1.9 OUTLINE OF THE STUDY .................................................................................................. 15 CHAPTER TWO ........................................................................................................................ 16 LITERATURE REVIEW .......................................................................................................... 16 2.0 INTRODUCTION.......................................................................................................... 16 2.1 THE0RETICAL LITERATURE REVIEW ................................................................... 16 2.2 EMPIRICAL LITERATURE REVIEW ........................................................................ 17 2.3 CONCLUSION .............................................................................................................. 20 CHAPTER THREE .................................................................................................................... 21 RESEARCH METHODOLOGY .............................................................................................. 21 3.0 INTRODUCTION.......................................................................................................... 21 3.1 RESEARCH DESIGN ................................................................................................... 21 3.2 DATA TYPES................................................................................................................ 22 3.3 EMPIRICAL MODEL ................................................................................................... 23 3.4 DATA COLLECTION PROCEDURES AND SOURCES ........................................... 24 3.5 DATA ANALYSIS AND PRESENTATION TECHNIQUES ..................................... 24 3.6 CONCLUSION .............................................................................................................. 24 CHAPTER FOUR ....................................................................................................................... 25 DATA PRESENTATION AND ANALYSIS ............................................................................ 25 4.0 INTRODUCTION.......................................................................................................... 25 4.1 TAX RATIO .................................................................................................................. 25 v

4.2 AVERAGE TAX BUOYANCY (REGRESSION) ....................................................... 26 4.3 ANNUAL TAX BUOYANCY ...................................................................................... 27 4.4 TAX ELASTICITY........................................................................................................ 28 4.5 CONCLUSION .............................................................................................................. 29 CHAPTER FIVE ........................................................................................................................ 30 RECOMMENDATIONS AND CONCLUSION ...................................................................... 30 5.0 INTRODUCTION.......................................................................................................... 30 5.1 CONCLUSION .............................................................................................................. 30 5.2 POLICY RECOMMENDATIONS ................................................................................ 31 5.3 FUTURE AREAS OF RESEARCH .............................................................................. 32 REFERENCE ................................................................................................................................ 33

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LIST OF TABLES AND FIGURES LIST OF TABLES

Table 1: Revenue Collections by ZIMRA against Ministry of Finance Target (2001-2011)... .... ... .... .... ... ... ... ......7 Table 2 : Collections as a Percentage of GDP... .... ..... ..... ....... ...... ....... ....... ....... ...... ....... .... ..... ...... ..... .............7 Table 3: ZIMRA Efficiency Vs MOF Target ... ..... ...... ...... ...... ...... ...... ...... ...... ...... ..... ..... ...... ..... ..... ..... ..... .. 8 Table 4: Annual Tax Buoyancy For Period 2000 2010 ... .... .... ..... ..... ...... ...... ....... ...... ...... ....... ...... ... ...........22 Table 5: Ordinary Least Squares Regression (Proportional Adjustment Method) ... .... .... .... ..... .... ..... .... ..... ..... .24

LIST OF FIGURES
Figure 1: Domestic Tax Revenue Contribution ........ ... .... ..... ..... .... ..... ...... ..... ..... .... .... ..... ..... .... .... ................ 6 Figure 2: Tax Performance as a percentage of GDP .... ..... ..... ..... ..... ..... ..... ...... ..... ..... ..... ..... .... ..... ..... ...... ... 11 Figure 3: Tax Ratio (2000-2010) .... .... ..... ..... ..... ..... ...... ....... ...... ...... ...... ...... ...... ....... ....... ...... .... ................ 21 Figure 4: Annual Tax Buoyancy for Period 2000 2010 ... ..... ..... ...... ..... ...... ...... ....... ....... ....... ...... ..... ........... 23

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ACRONYMS
ARA GDP HSH IMF MOF SADC SNA VAT ZIMRA ZIMSTATS ZWD Semi-Autonomous Revenue Authority Gross Domestic Product Haig-Simons-Hicks International Monetary Fund Ministry of Finance Southern African Development Committee Systems of National Accounts Value Added Tax Zimbabwe Revenue Authority Zimbabwe Statistics Zimbabwe Dollars

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CHAPTER ONE INTRODUCTION

1.0 INTRODUCTION The question "what is income?" has preoccupied many economists and policymakers for a long time. National rulers have always been interested in an income concept that can be used as a yardstick for taxation (Musgrave 1985). In the twentieth century, the emergence of demand management policies and national income accounting also brought substantial government involvement in developing concepts of income. Economists have been deeply entangled in developing concepts of taxable income, personal income, and national income in various capacities: as theoreticians, policymakers, and government bureaucrats (Kendrick 1970, Usher 1987).

A concept of income is worth to be analysed as the tax revenue collected in any economy depends on the level of income. There is a positive correlation between tax revenue and national income. This relationship is explained by the differences in revenue performance between developed nations and developing nations, with the developed nations having higher levels of performance. The study will utilise the Haig-Simons-Hicks definition of income to comment on the level of taxable income in the economy. Taxable income will be further compared to the tax revenue being collected by the Zimbabwe Revenue Authority, that is, tax performance and tax efficiency. Possible underlying factors will be discussed for the level of tax performance and tax efficiency levels.

Concepts of personal income and national income used by most government agencies and economists today have been often compared to the so-called Haig-Simons-Hicks (HSH) concept of income (Haig 1921, Hicks 1939, Simons 1938). Implicitly or explicitly, this concept is usually considered the theoretical concept of income. According to the HSH definition, income in a given period of time is the maximum amount that can be consumed in that period while keeping real wealth unchanged. The 1993 System of National Accounts (1993 SNA), the landmark publication on national income accounting put together by prominent international organizations 1

such as the United Nations, expressed the widely-held view that, "from a theoretical point of view, income is often defined as the maximum amount that a household can consume without reducing its real net worth." (1993 SNA, Section 8.15, p.186).

The HSH concept is accepted as the theoretical concept of income even by some critics of the official income statistics: "The theoretical Hicks-Haig-Simons concept of income is that which we can consume while keeping our real wealth intact. But this is a far cry from the usual measures of individual incomes, corporate profits or the aggregates of personal and national income." (Eisner 1989, 2). In the field of household income statistics, a recent study aimed at developing a uniform definition of household income for the purposes of international comparisons took as its theoretical starting point the HSH concept (Smeeding and Weinberg 2001, 2).

Given its pervasive influence, it is useful to examine the original context in which the HSH concept was constructed. Of the three architects, Hicks was arguably the one who made the most theoretically sophisticated contribution to the concept. At the outset, it is useful to recall a remarkable feature of Hicks's discussion that appears to have been ignored in the subsequent literature. Chapter 14 was placed before Part IV of the book, where he purportedly developed a theory of economic dynamics without using the concept of income (whether that of an individual or of an entire nation), as well as related categories such as saving, investment, and depreciation. The explicit purpose of the chapter was to justify this procedure. This justification took the form of a demonstration that the concept of income was theoretically vacuous. It cannot be defined unequivocally and any operational definition of income involves a great deal of imprecision. The notion of a "theoretical concept of income" was for Hicks a contradiction in terms. It is paradoxical that, given this feature of Hicks's arguments, later economists tend to locate the theoretical concept of income here. Tax revenue is very critical for any economy especially developing nations like Zimbabwe. The revenue is mainly used to purchase or produce public goods like national security, street lights, and roads and in some cases as emergency for disease outbreaks and drought years. Currently the

Zimbabwean nation is relying heavily on tax revenue as the profitability of parastatals1 has remained a questionable event for the past years. Tax systems should be adequately stable and buoyant2 in order to enable a country to meet its increasing financial commitments as its gross domestic product (GDP) grows. If the tax revenue of a country is stable and buoyant, there is a high probability that its public expenditure needs will be adequately met over time. If GDP is growing more than tax revenues then it could be one policy indicator that the tax structure needs reform. The study of tax buoyancy is of much importance because it is both a quality and quantity measure of tax performance. Tax buoyancy can also be used to summarize revenue growth over time, (Zolt, 2003:8). Finally, it shows the strength of the tax system in the country when they are subjected to certain environments for example when a certain sector is declining.

1.1

BACKGROUND

The background section aims at analysing basic underlying issues of taxation in Zimbabwe and presenting the tax structure with reasons for such a structure. General comments and facts for the developing world will also be discussed.

1.1.1

TAX SYSTEM IN ZIMBABWE

Zimbabwe, like some developing countries face formidable challenges when they attempt to establish efficient tax systems. First, most workers in the country are typically employed in agriculture and in small informal enterprises. Workers are seldom paid a regular, fixed wage, and hence their earnings fluctuate, and many are paid in cash (commonly known as "off the books"). This implies that base for an income tax is therefore hard to calculate. Another observed aspect is that workers in the country rarely spend their earnings in large stores that keep accurate records of sales and inventories. As a result, modern means of raising revenue, such as income taxes and consumer taxes, play a diminished role in the country, and the possibility that the government will achieve high tax levels is virtually excluded.
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Zimbabwean parastatals have remained loss making for quite long hence main source of government remains tax revenue. 2 The tax system should be responsive to changes in the tax base, usually GDP.

Second, it is difficult to create an efficient tax administration without a well-educated and welltrained staff, when money is lacking to pay good wages to tax officials and to computerize the operation (or even to provide efficient telephone and mail services), and when taxpayers have limited ability to keep accounts. As a result, governments often take the path of least resistance, developing tax systems that allow them to exploit whatever options are available rather than establishing rational, modern, and efficient tax systems.

Third, because of the informal structure of the economy and because of financial limitations, statistical and tax offices have difficulty in generating reliable statistics. This lack of data prevents policymakers from assessing the potential impact of major changes to the tax system. As a result, marginal changes are often preferred over major structural changes, even when the latter are clearly preferable. This perpetuates inefficient tax structures.

Fourth, income tends to be unevenly distributed within the country. Although raising high tax revenues in this situation ideally calls for the rich to be taxed more heavily than the poor, the economic and political power of rich taxpayers often allows them to prevent fiscal reforms that would increase their tax burdens. This explains in part why many developing countries have not fully exploited personal income and property taxes and why their tax systems rarely achieve satisfactory progressivity.

In summary, tax policy is often the art of the possible rather than the pursuit of the optimal. It is therefore not surprising that economic theory and especially optimal taxation literature have had relatively little impact on the design of tax system in Zimbabwe.

1.1.2

TAX STRUCTURES DEVELOPING NATIONS

Tax policies seen in developing countries are puzzling on many dimensions. To begin with, revenue/GDP is surprisingly small compared with that in developed economies. Taxes on labor income play a minor role. Taxes on consumption are important, but effective tax rates vary dramatically by firm, with many firms avoiding taxes entirely by operating through cash in the

informal economy and others facing very high liabilities. Taxes on capital are an important source of revenue, as are tariffs and seignorage, all contrary to the theoretical literature.

Personal Income Tax. Any discussion of personal income tax in developing countries must start with the observation that this tax has yielded relatively little revenue in most of these countries and that the number of individuals subject to this tax (especially at the highest marginal rate) is small. The rate structure of the personal income tax is the most visible policy instrument available to most governments in developing countries to underscore their commitment to social justice and hence to gain political support for their policies. Countries frequently attach great importance to maintaining some degree of nominal progressivity in this tax by applying many rate brackets, and they are reluctant to adopt reforms that will reduce the number of these brackets.

More often than not, however, the effectiveness of rate progressivity is severely undercut by high personal exemptions and the plethora of other exemptions and deductions that benefit those with high incomes (for example, the exemption of capital gains from tax, generous deductions for medical and educational expenses, the low taxation of financial income). Tax relief through deductions is particularly egregious because these deductions typically increase in the higher tax brackets. Experience compellingly suggests that effective rate progressivity could be improved by reducing the degree of nominal rate progressivity and the number of brackets and reducing exemptions and deductions. Indeed, any reasonable equity objective would require no more than a few nominal rate brackets in the personal income tax structure. If political constraints prevent a meaningful restructuring of rates, a substantial improvement in equity could still be achieved by replacing deductions with tax credits, which could deliver the same benefits to taxpayers in all tax brackets.

Corporate Income Tax. Tax policy issues relating to corporate income tax are numerous and complex, but particularly relevant for developing countries are the issues of multiple rates based on sectoral differentiation and the incoherent design of the depreciation system. Developing countries are more prone to having multiple rates along sectoral lines (including the complete exemption from tax of certain sectors, especially the parastatal sector) than industrial countries, 5

possibly as a legacy of past economic regimes that emphasized the state's role in resource allocation. Such practices, however, are clearly detrimental to the proper functioning of market forces (the sectoral allocation of resources is distorted by differences in tax rates). They are indefensible if a government's commitment to a market economy is real. Unifying multiple corporate income tax rates should thus be a priority.

Allowable depreciation of physical assets for tax purposes is an important structural element in determining the cost of capital and the profitability of investment. The most common shortcomings found in the depreciation systems in developing countries include too many asset categories and depreciation rates, excessively low depreciation rates, and a structure of depreciation rates that is not in accordance with the relative obsolescence rates of different asset categories. Rectifying these shortcomings should also receive a high priority in tax policy deliberations in these countries.

Value-Added Tax. While VAT has been adopted in most developing countries, it frequently suffers from being incomplete in one aspect or another. Many important sectors, most notably services and the wholesale and retail sector, have been left out of the VAT net, or the credit mechanism is excessively restrictive (there are denials or delays in providing proper credits for VAT on inputs), especially when it comes to capital goods. As these features allow a substantial degree of cascading (increasing the tax burden for the final user), they reduce the benefits from introducing the VAT in the first place. Rectifying such limitations in the VAT design and administration should be given priority in developing countries.

Many developing countries have adopted two or more VAT rates. Multiple rates are politically attractive because they ostensibly serve an equity objective, but the administrative price for addressing equity concerns through multiple VAT rates may be higher in developing than in industrial countries. The cost of a multiple-rate system should be carefully scrutinized.

Excise tax. The most notable shortcoming of the excise systems found in many developing countries is their inappropriately broad coverage of products, often for revenue reasons, Tanzi and Zee (2001). As is well known, the economic rationale for imposing excises is very different 6

from that for imposing a general consumption tax. While the latter should be broadly based to maximize revenue with minimum distortion, the former should be highly selective, narrowly targeting a few goods mainly on the grounds that their consumption entails negative externalities on society. The goods typically deemed to be excisable (tobacco, alcohol, petroleum products, and motor vehicles) are few and usually inelastic in demand. A good excise system is invariably one that generates revenue (as a by-product) from a narrow base and with relatively low administrative costs.

1.1.3

COMPOSITION OF TAXES IN ZIMBABWE

The main source of revenue include taxes on income and profits for both individuals and corporates; taxes on goods and services in the form of value added tax, customs duty and excise duty; revenue from Investments and properties, that is, interest and dividends; international aid and grants, and miscellaneous taxes in the form of stamp duties, fees, estate duties and business licenses. This is in detail in Figure 1 below:

Figure 1: Domestic Tax Revenue Contribution

Source: Regional Integration in Southern Africa, Vol.6, p.38.

Individual taxes formed the greater part of tax revenue (37.9%), this is mainly because it is very difficult to evade income taxation and it is well recorded. The other major contributor being value added tax (29.1%) with excise duty (2.9%) contributing a smaller percentage of revenue showing that the bulk of tax revenue is from individuals and companies. The probable reason is 7

that individual and company taxes are easier to collect than other forms of taxes and this is in line with the tax handle theory to be discussed in literature.

1.1.4

SEMI-AUTONOMOUS REVENUE AUTHORITIES

Historically, ministries of finance have existed to collect and manage government revenues. They rarely have a complete monopoly over collection (Fjeldstad and Moore, 2008:2). The creation of Semi Autonomous Revenue Authorities (ARAs) has improved relationships between tax authorities and larger corporate taxpayers, and increased, at least marginally, the capacity of governments to raise revenue. In the last two decades, there appears to have been a trend among developing countries towards the creation of ARAs to replace their existing tax collection agencies (Manasan, 2003:1). In many of these countries, the radical reform of the tax agency was primarily intended to improve revenue performance in the face of deep-seated problems in tax administration. Tax experts (e.g., Silvani and Baer 1997 and Jenkins 1994) have suggested the imperative for radical changes in tax administration in countries where the tax gap is large (i.e. 40% or more). In the eyes of a few academics and external observers, the introduction of revenue agencies has been seen as a step on the road to privatisation of the revenue collection process (Kiser and Sacks 2007; Devas et al. 2001; Byrne 1995). Despite the rhetoric and debate about autonomy, there has been very little loosening of the political and bureaucratic grip of central executive authorities over the revenue collectors. Presidents and Ministers of Finance are still very much in control. President Museveni in 2000, described the Uganda Revenue Authority as a den of thieves (Therkildsen, 2004:82).

In Zimbabwe, for instance the Zimbabwe Revenue Authority (ZIMRA) came into operation on 1 September 2001 to take over dealings in taxation transactions from the Ministry of Finance. Its mission was to facilitate economic development, trade and travel, revenue generation and collection, to enforce compliance with revenue laws and enforce regulatory controls with integrity, transparency and fairness (Saruchera, 2009:3). However the success of the ZIMRA in improving tax performance did not come about due to several reasons. The organization was set in a period of economic crisis therefore it did not receive full attention from relevant authorities and also the underground economy was heavily growing hence hindering tax collection. There were manpower shortages due to brain drain as revenue officers were moving out of the country 8

in search of greener pastures and this affected revenue collection as training of new staff is expensive. Increased bribery and corruption was another problem such that due to economic hardships tax payers were paying the officers privately so as not to face full tax charges (Chiminya, 2008). Smuggling of goods was a contributing factor as officials connive with traders (revenue leakage). Also there was tax erosion due to inflation, this was due to the gap between tax payments dates scheduled and actual days it was paid, and there were delays in debt follow up. Tax law implementation tools have been lacking, especially to avoid smuggling of goods through informal entry and exit points in the country borders. Such requires the assistance of military and police personnel.

1.1.5

NATIONAL TAXABLE INCOME

Taxable income refers to the base upon which an income tax system imposes tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that some types of income are not taxable and some expenditures not deductible in computing tax. Some systems base tax on taxable income of the current period, and some on prior periods. Taxable income may refer to the income of any taxpayer, including individuals and corporations, as well as entities that themselves do not pay tax, such as partnerships.

Most systems require that all income realized be included in taxable income. Some systems provide tax exemption for some types of income. Many systems impose tax at different rates for differing types (e.g., capital gains or salaries) or levels of income (e.g., graduated rates). In the United States, gross income includes all income realized from whatever source, but excludes particular tax exempt items, such as municipal bond interest. In 2010, the United Kingdom and the United States both provided reduced rates of tax for capital gains and dividends. Most systems and jurisdictions allow business taxpayers to reduce taxable income by cost of goods or other property sold, as well as deductions for business expenses. Many systems limit some sorts of business deductions. For example, deductions for automobile expenses are limited in the United Kingdom and United States.

Some systems allow tax deductions for certain non-business expenses. Such deductions may include personal expense items, such as a home mortgage interest deduction, and vary widely by jurisdiction. In addition, many systems allow deductions for personal allowances or a minimum deemed amount of personal deductions. The United States Federal system allows a deduction for personal exemptions, as well as a minimum standard deduction in lieu of other personal deductions. Some states in the United States allow few personal deductions.

1.1.6

EFFICIENCY OF ZIMRA IN TAX COLLECTION

The Zimbabwe Revenue Authority is responsible for the collection of taxes on behalf of the Ministry of Finance (MOF). The MOF set some targets for ZIMRA on the level of income they should raise annually by implementing the relevant tax statutes. Hence, it is the duty for ZIMRA to apply all its effort and skills in order to meet the targets. The set targets however are based on an economic formula that looks at the potential of the economy to be taxed to such a level and also incorporating the increasing need for government spending. The Table 1 below shows how efficient ZIMRA is in relation to the MOF targets.

Table 1: Revenue Collections by ZIMRA against Ministry of Finance Target (2001-2011).

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Target ZWD 132,205,200.00 ZWD 240,867,703 ZWD 1,147,150,430 ZWD 7,227,342,110 ZWD 24,190,773,325 ZWD 317,590,000,000 ZWD 30,026,802,809,379 ZWD 1,291,792,326,598,340,000 USD 1,051,489,093 USD 1,919,333,105 Collections ZWD 131,095,186.000 ZWD 286,080,498 ZWD 1,340,263,640 ZWD 7,870,044,779 ZWD 32,071,228,846 ZWD 406,677,663,936 ZWD 89,051,653,471,682 ZWD 14,465,620,196,460,000,000.000 USD 988,478,184 USD 2,238,240,231.58 % Collections 99% 119% 117% 109% 133% 128% 297% 1120% 94% 115% Variance -1% 19% 17% 9% 33% 28% 197% 1020% -6% 15%

Source: ZIMSTATS 2011.

From Table 1 above, it can be merely concluded that ZIMRA is efficient in collecting taxes as evidenced by surpassing the MOF targets. It is only in 2001 and 2009 that ZIMRA failed to

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meet MOF targets, with 1% and 6% deviations consecutively. Some incentives3 are given to ZIMRA in order for it to work very hard to meet the target. Tax performance can be presented as a percentage, that is, revenue collections are expressed as a percentage of total national income. This percentage is known as tax ratio, and is a common measure of efficiency of a tax system or tax performance of a country. Table 2 (next page) shows the tax performance over 2002 to 2010 period, with the average lying below 35% (eliminating 2008 for analysis)4. The average, however is lower than that of developed nations (38.4), despite the fact that Zimbabwe just like other developing nations relies on tax revenue for public spending. Table 2 : Collections as a Percentage of GDP.
Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 GDP-ZIMSTATS Z$1,698,180,000.00 Z$ 5,518,757,000.00 Z$ 24,655,000,000.00 Z$92,000,000,000.00 Z$1,030,000,000,000.00 Z$250,000,000,000,000.00 Z$1,451,922,797,628,780.00 US$5,600,000,000.00 US$6,715,000,000.00 Collections Z$286,080,498.00 Z$1,340,263,640.00 Z$7,870,044,779.06 Z$32,071,228,846.00 Z$406,677,663,936.00 Z$89,051,653,471,689.00 Z$14,465,620,196,460,000,000.00 USD988,478,183.97 USD2,214,514,806.53 % Performance 17% 24% 32% 35% 39% 36% 996 308% 18% 33%

Source: ZIMSTATS 2011.

Graphical analysis of the tax revenue collections as a percentage of national income is presented in Figure 2 below. A graphical analysis clearly shows the trend of performance and fluctuations over the period. It also helps in forecasting future performance assuming everything remains constant. For year 2008, a downward interpolation has been used to determine the real value of tax collections.

3 4

Incentives are in form of increased salaries and/or bonus to workers. This has been the norm over the years. 2008 was a period of national crisis, which have seen Zimbabwe experiencing hyperinflation environment.

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Figure 2: Tax Performance as a percentage of GDP.

Figure 2 clearly shows that the tax performance have been improving over the years from 2002 up to 2006, then it started falling sharply till 2009, when it then rose sharply. The peak performance was seen in 2006. However, the performance issue really need to be addressed to avoid such fluctuations. 1.2 PROBLEM STATEMENT Poorer countries collect on average only two-thirds or less of the amount of tax revenue that richer countries do, as a fraction of GDP5, yet, given the severe needs for investments in say infrastructure and education. While the personal income tax is the dominant source of tax revenue among richer countries, it is only a minor source of revenue among the poorest countries.

Volatility in Zimbabwe Revenue Authority efficiency in collecting revenue (versus Ministry Target). The performance of ZIMRA over Ministry targets cannot be forecasted, as each year has its own level of performance and hence the conclusion that the organisation is efficient cannot be

Developed world have various sources of income for public spending, for example their parastatals are efficient and hence are profit making.

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concluded. Either the Ministry formula is biased or is based on inaccurate information about the capacity of the economy. The variance is presented in Table 3 below. Table 3: ZIMRA Efficiency Vs MOF Target
Year 2001 Variance -1% 2002 19% 2003 17% 2004 9% 2005 33% 2006 28% 2007 197% 2008 2009 1020% -6% 2010 15%
Source: ZIMSTATS 2011.

Table 3 above clearly shows that there is no relationship of the variability in performance over the period under study. The variability is too oscillating, and hence efficiency conclusion cannot be made.

Despite the reliability in tax revenue as a major source of income, the tax ratio remains lower in Zimbabwe. This is supported by tax elasticity that is less than unity. Also to note is that the national income is under defined (understated in official statistics). Tax rates are high in Zimbabwe, and this is witnessed by continuous cry by corporate and individuals in the formal industry. Some sectors are overtaxed. The existence of revenue leakages in the economy especially from the import and export sectors implies the tax laws and systems are failing to address tax avoidance and tax evasion issues.

1.3 RESEARCH OBJECTIVES The research objectives of the study are as follows; To calculate Tax Elasticity and Buoyancy of the tax system. To comment on Elasticity and Buoyancy of the tax system. To determine and explain the link between GDP and tax revenue over the years. To determine if the definition of income is well implemented and sort for ways to implement tax laws on income. To determine tax base broadening methods.

1.4 RESEARCH QUESTIONS The research questions of the study can be stated as follows; Is the Zimbabwe Tax System responsive to national income changes? How efficient is the Zimbabwean Tax System? 13

What is the level of tax performance in Zimbabwe? Why is the taxable income understated? Is the Zimbabwe Revenue Authority really efficient in collecting taxes? Is the Zimbabwe Revenue Authority really efficient in implementing tax laws?

1.5 RESEARCH METHODOLOGY The study will utilise secondary quantitative data to empirically analyse the tax performance and tax efficiency of the Zimbabwean Tax System and also to analyse the relationship between national income and tax performance level in the country. Calculation of tax elasticity and tax ratios will be done using appropriate methods for analysis purposes. A Trend Analysis will also be utilised to explain the behaviour of variables over the years, in order to determine the underlying factors for such trends. Statistical regression will also be done using the Stata (version 10) Econometric software, with possible data transformation and tests, to maximise efficient and unbiased estimates for policy conclusion. The research methodology will help us answer the research questions and guide us on ways to solve the underlying research problems discussed above.

1.6 DATA COLLECTION TECHNIQUES Quantitative data will be utilised and collected from various government publications, ZIMRA News bulletins, and Computerised data bases (ZIMSTATS, World Bank and IMF publications). Quantitative data is data already collected by reliable statistical departments and is ready for use. Data will be collected as from 2000 to 2010, which is a period enough for some policy conclusion and suggestions. Also the data will be organised in the manner which suits an explanation to be raised.6 While some data has been collected in mixed currencies, the data used for regressions has been restricted to United States Dollars for uniformity and international comparisons.7 In comparison with the Zimbabwean Dollar8, the United States Dollar is more stable and ensures real economic value to be used for policy analysis.

This includes tables, line graphs and bar graphs. The United States Dollars has been used as many national data for international publication are expressed in the currency. 8 The Zimbabwean Dollar disappeared in 2009 due to recession in the economy which forced the currency to be substituted by other multiple stable currencies.
7

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1.7 SIGNIFICANCE OF THE STUDY The study is of relevance as it seeks to address the major constraints to the implementation of income tax laws, determine the level at which tax collection can be emphasized, and how fairness should be applied across sectors and individual tax payers, and how the efficiency of ZIMRA can be utilised to raise more revenue for the economy. In summary, the study is of help to ZIMRA as an organisation (addressing bottlenecks) and to the nation at large (ensuring continuous supply of public goods).

1.8 LIMITATIONS OF THE STUDY The study is done over a short period of time. This may cause some aspects and concepts necessary for analysis to be omitted or under investigated. However the study has tried its best to capture relevant concept to answer research questions in order to address problem of the study. It was worthy to analyse individual tax , but individual tax data was difficult to get and its individual analysis will demand more time. Hence the study used the overall analysis of combined statistics.

1.9 OUTLINE OF THE STUDY In the first chapter an introduction and the background of the study are well presented. Theoretical and empirical literature review of tax performance is done in the second chapter. Literature of tax structure, tax performance and tax efficiency will be presented. The focus of the third chapter is to outline the methodology that is going to be used in the study in examining the tax system performance as well as ZIMRA efficiency. The fourth chapter presents a discussion and assessment of the estimation procedure and the interpretation of results found. And finally, the fifth chapter is for conclusion of study and policy recommendations.

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CHAPTER TWO LITERATURE REVIEW

2.0 INTRODUCTION Chapter Two reviews both theoretical and empirical literature. The literature review will help us answer the research questions and in determining the best model to use for better results. The literature review will cover cases for developing nations and developed nations as well, for comparative purposes and possible inefficiency analysis.

2.1 THE0RETICAL LITERATURE REVIEW The normative bent of the literature on tax policy deals with the questions of why a country develops a particular tax structure and why this tax structure differs among countries and changes during the process of economic growth, Chiminya (2008). This strand of tax literature not only recognizes the importance of administrative constraints on tax policy, but in contrast to the normative literature places administrative factors at the forefront.

The "tax handle" theory offers a sweeping historical explanation of tax structure change, Tanzi (2001). It argues that low-income economies are forced to collect revenue from easy-toadminister taxes (or tax handles), but that this administrative constraint lessens as countries develop and become able to choose "better" taxes as defined by the normative objectives discussed above. Measures of tax handles typically include per capita income, trade taxes and the proportion of people living in urban areas (Liebaman, 2003). Although economists differ on the recipe for a "better" tax structure, there would be general agreement that broadly based income or consumption taxes are preferable to a reliance on foreign trade taxes, and historical evidence suggests such a shift. In any case, high-income economies have a certain freedom to manoeuvre in choosing tax systems, whereas low-income economies are in large part constrained by administrative considerations. In accordance with the tax handle theory, the effective tax structure of developing countries is characterized by reliance on narrow tax bases, reflecting administrative convenience. 16

Considering import duties and export duties, the centralization of taxable goods in a port leads to ease of administration. For excises, production of goods is concentrated in a few factories. For the personal income tax, withholding of taxes on wages paid by large enterprises and government is the meaning of administrative convenience. However, corporate income tax may be inherently more difficult to administer because the base of net profits requires more sophisticated accounting measures such as depreciation. In this case administrative convenience may take the form of simply accepting, with only perfunctory audit that presents no serious challenge, a "reasonable" amount of taxation as defined by the firm. If firms are unwilling to contribute a reasonable sum, governments may then adopt simple rules of thumb, such as using a percentage of gross sales to replace the concept of net profit. Musgrave (1984), argues that tax structure is shaped by economic factors which account for the size of different tax bases and by political and social factors which influence opinions on tax equity. Government centralization is favourable for direct taxes on income and wealth because of its administrative advantages in assessing these taxes.

The optimal tax theory, the reigning normative approach to taxation combines information on a countrys economic structure, the set of available taxes to the government and the objectives of tax policy to make recommendations on tax mix, structure and incidence (see Slemrod, 1990; Burgess and Stern, 1993). Optimal taxes are those that raise a desired amount of revenue with the lowest marginal efficient cost, with few distortions and that promote the desired amount of wealth. While optimal tax theory tackles the trade off of different taxes, it does not explain the structure of government revenues. The standard optimal tax theory assumes that individuals and firms voluntarily pay their tax liability. This assumption is inaccurate since individuals pursue many illegal avenues to reduce their payments such as underreporting incomes, hence there is evidence in many countries that tax evasion is extensive.

2.2 EMPIRICAL LITERATURE REVIEW According to Duff (2008), a concept of income serves a valuable role in tax law and policy, as a touchstone against which existing tax rules may be assessed and tax reforms may be judged, as a benchmark against which departures may be identified and evaluated, and as an interpretive guide for judicial decisions in difficult cases. As a normative ideal, a concept of income should 17

reflect an ethically appealing conception of tax fairness or distributive justice that supports not only the concept itself but the taxation of income more generally. As a guide to legislative reform and judicial interpretation, a concept of income should also promote specific results that are consistent with what John Rawls (1971) calls our considered convictions or judgments about what is fair or just.

In North America, the so-called Haig-Simons definition of income has been the dominant concept of income since at least the 1960s, Borris (1967). Named after U.S. economists Robert Haig and Henry Simons (each of whom advanced distinct but similar definitions of income in the 1920s and 1930s), this concept defines income as the money value of the net accretion to ones economic position between two points of time (Haig), or as the sum of consumption and accumulation (Simons).

Surrey (1985), explained that in the United States, the definition has been central to the concept of tax expenditures, and influenced base-broadening efforts such as the Tax Reform Act of 1986. Eugene (1986), said something about Canada, the Haig-Simons definition was the intellectual inspiration for the Royal Commission on Taxation (Carter Commission), which favoured a comprehensive tax base defined as the sum of the market value of goods and services consumed or given away in a taxation year by the tax unit, plus the annual change in the market value of the assets held by the unit. In both countries, tax scholars routinely refer to the HaigSimons definition as the normative standard for income taxation not only to evaluate existing income tax rules and advocate specific reforms, but also to criticize the taxation of income and advocate alternatives like consumption taxation.

According to Hicks (1939), the purpose of income calculations in practical affairs is to give people an indication of the amount which they can consume without impoverishing themselves. Following out this idea, it would seem that we ought to define a man's income as the maximum value which he can consume during a week, and still expect to be as well off at the end of the week as he was at the beginning. Thus, when a person saves, he plans to be better off in the future; when he lives beyond his income, he plans to be worse off. Remembering that the practical purpose of income is to serve as a guide for prudent conduct, I think it is fairly clear 18

that this is what the central meaning must be.The central meaning of income is also subjective for him in the sense that it is formulated in terms of the individual's expectations.

Keynes (1964) observed in his own chapter on the definition of income in the General Theory : It will be seen that our definition of net income comes very close to Marshall's definition of income, when he decided to take refuge in the practices of the Income Tax Commissioners and broadly speakingto regard as income whatever they say, with their experience, choose to treat it as such. For the fabric of their decisions can be regarded as the result of the most careful and extensive investigation which is available, to interpret what, in practice, it is usual to treat as net income.

According to McIntyre (1984), commentators traditionally have formulated the base of their ideal

tax by reference to the uses of income (consumption and savings), not to the sources of income (wages, dividends, capital gains, etc.). The author suggested that in order to design an operating tax system, tax specialists must convert a base specified in terms of uses of income into one specified in terms of sources of income. Muriithi and Moyi (2000) applied the concepts of tax buoyancy and elasticity to determine whether the tax reforms in Kenya achieved the objective of creating tax policies that made yield of individual taxes responsive to changes in national income. They used the proportional adjustment method to estimate the responsiveness of tax yields on income. The results showed that tax reforms had a positive impact on the overall tax structure and on individual tax handles. The study concluded that despite the positive impact, the reforms failed to make value added tax (VAT) responsive to changes in income. However, VAT had been around for about eleven years only and subjecting it alone in a regression model did not make statistical sense.

A study by Osoro (1993) examined the revenue productivity implications of tax reforms in Tanzania. In the study, the tax buoyancy was estimated using the double log form equation and tax revenue elasticity using the proportional adjustment method. The argument for using the method was that a series of discretionary changes had taken place during the sample period 1979-89, making the use of dummy variable technique impossible to apply (Osoro, 1993:14). For 19

the study, the overall elasticity was 0.76 with a buoyancy of 1.06. The conclusion was that tax reforms in Tanzania had failed to raise tax revenues. The reasons were that government granted numerous tax exemptions in conjunction with poor tax administration.

Tax buoyancy has been estimated using the proportional adjustment method in a study by Chipeta (1998). He evaluated the effects of tax reforms on tax yields in Malawi for the period 1970-94. The results revealed a buoyancy of 0.95 and an elasticity of 0.6. The study concluded that the tax bases had grown less rapidly than GDP. Kusi (1998) studied tax reform and revenue productivity of Ghana from 1970 to 1993. Results showed a pre-reform buoyancy of 0.72 and elasticity of 0.71 for the period 1970-82. The period after reform (1983-93), showed increased buoyancy of 1.29 and elasticity of 1.22. The study concluded that reforms had contributed significantly to tax performance.

A study carried out by Teera (2000) found that the results of the dynamic measure of tax performance (tax buoyancy) indicate that the high-income OECD group has the least percentage number of countries with a buoyancy ratio below unity, followed by the lower middle-income group. This implies that the lower income groups have made less effort to increase tax revenue over the period as compared to the higher income groups.

2.3 CONCLUSION The chapter put forward both theoretical and empirical literature on definition of taxable income, tax buoyancy and tax elasticity. The review enables the research models to be identified and be applied to answer the research questions. The next chapter focus on the methodology to be used for the study.

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CHAPTER THREE RESEARCH METHODOLOGY

3.0 INTRODUCTION The main objective of this chapter is to discuss the econometric model to be applied in this study. Specifically, it encompasses the model to be adopted, definition of variables, their proxies, estimation techniques, data types, data collection procedures and sources, research instruments and data analysis and presentation techniques.

3.1 RESEARCH DESIGN Tanzi and Zee (2001), An alternative, statistically based approach to assessing whether the overall tax level in a developing country is appropriate consists of comparing the tax level in a specific country to the average tax burden of a representative group of both developing and industrial countries, taking into account some of these countries' similarities and dissimilarities. This comparison indicates only whether the country's tax level, relative to other countries and taking into account various characteristics, is above or below the average. This statistical approach has no theoretical basis and does not indicate the "optimal" tax level for any country. The most recent data show that the tax level in major industrialized countries (members of the Organization for Economic Cooperation and Development or OECD) is about double the tax level in a representative sample of developing countries (38 percent of GDP compared with 18 percent).

Not undermining the approach suggested by Tanzi and Zee (2001), the current study will utilise the Elasticity and Buoyancy Approach in assessing the efficiency of ZIMRA in collecting taxes, implementation of tax laws and also in assessing the overall tax level as compared to the potential and actual national income. Common measures of the ability of the tax system to mobilize revenues are buoyancy and elasticity (Asher 1989).

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Tax buoyancy measures the total response of tax revenue to changes in national income (Begum, 2007). Year to year buoyancy measures the volatility of the tax and the ability of government to meet the demands of their constituents. As an economy grows, income of taxpayers grows and the demand for public services tends to increase. If tax revenues grow less quickly than the economy, then the public sector will not be able to meet increased demand for better social amenities. Low tax buoyancy suggests that governments may face increased public pressure for better and/or more services but with slower growing revenue sources.

Tax elasticity is defined just like tax buoyancy, but there is a crucial difference, which is that revenue is calculated as it would have been if there had not been any change in the tax laws, including the tax rates or bases. Thus the tax elasticity is a hypothetical construct. It tries to reconstruct what would have happened if there had been no changes in the tax rules - i.e. what tax revenue would have been if last years laws continued to apply this year.

3.2 DATA TYPES The study will be based on secondary data for analysis. Secondary data is data collected by someone other than the user. According to Forestry Commission (2004), Secondary Data is existing information that has been gathered for some purpose outside the planning process. Common sources of secondary data include censuses, surveys, organizational records and data collected through qualitative methodologies or qualitative research. Primary data, by contrast, are collected by the investigator conducting the research. External data are gathered by other organisations either for their own use or for commercial use. General sources of external data are, for instance, various computerised databases, associations, other government agencies and different published sources such as libraries and newspapers.

Secondary data analysis saves time that would otherwise be spent collecting data and, particularly in the case of quantitative data, provides larger and higher-quality databases than would be unfeasible for any individual researcher to collect on their own. In addition to that, analysts of social and economic change consider secondary data essential, since it is impossible to conduct a new survey that can adequately capture past change and developments.

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A clear benefit of using secondary data is that much of the background work needed has been already carried out. This wealth of background work means that secondary data generally have a pre-established degree of validity and reliability which need not be re-examined by the researcher who is re-using such data.

3.3 EMPIRICAL MODEL The traditional model used to estimate tax buoyancy requires GDP to be a determinant of tax revenue. Several studies (Wawire, 2000; Ariyo, 1997; Quazi, 1994; Osoro, 1993) of tax buoyancy have used the following model:

Where; T tax revenue, Y- income (GDP), natural number.

- constant term,

- buoyancy coefficient,

The double-log version of the above equation is estimated using ordinary least squares (OLS). This model works for periodic buoyancy, that is the average for the period under study. Annual tax buoyancy will also be calculated using the following formula:

Tax elasticity will be estimated using the Proportional Adjustment Method. This has been suggested by Sahota (1961) and Prest (1962) and was later described by Mansfield (1972) and used by Omoruyi (1983), Osoro (1993) and Ariyo (1997). The method involves isolating the data on discretionary revenue changes based on data provided by government. The resulting data reflect only what the collections would have been if the base year structure had been in force throughout the sample period (Osoro, 1993:13). The adjusted data is then used to estimate the following equation;

Where

provides an estimate of the income elasticity of the

tax.

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3.4 DATA COLLECTION PROCEDURES AND SOURCES Data on national income (GDP), total tax revenue, total income taxes and other relevant data for the study will be mainly secondary data. The data will be collected from various reputable sources namely the ZIMRA Database, World Bank Database, IMF Publications and other publications. Due to time the time frame of the study, data published on the internet will be used and the sources will be used to complement each other and to confirm conformity. International publications like the IMF and World Bank are used as they have variables data in currencies for international comparisons, that is, in United States Dollars. Uniformity in currency ensures appropriate regressions, graphics and comparability over the years.

3.5 DATA ANALYSIS AND PRESENTATION TECHNIQUES Data analysis will be in form of tables, graphs (both bar graphs and line graphs) and regressions. Regressions will be done using the Stata (version 10) Statistical software, which is the current prevailing software. Stata is user friendly and command sensitive, which makes it most preferred in this study.

Basic statistical tests will be carried out, that is, checking for collinearity, heteroskedasticity and multicollinearity. Data transformation will be necessary for this study, that is, converting data to its log linear format for regression analysis of tax elasticity. The regression model will be tested using the rule of thumb (5% Confidence Interval).

3.6 CONCLUSION This chapter has outlined the methodology, estimation procedures and data analysis methods to be employed in the next chapter. The next chapter concentrates on estimation and interpretation of results as well as graphical analysis.

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CHAPTER FOUR DATA PRESENTATION AND ANALYSIS

4.0 INTRODUCTION This chapter focuses on explaining data tables and graphs, analysing trends and estimation of the statistical. The chapter will present summary statistics, results of relevant test undertaken in the study and final results to be used to conclude the study.

4.1 TAX RATIO Figure 3: Tax Ratio (2000-2010)

Tax Ratio
45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: ZIMRA News Bulletin, 2011.
Tax Ratio

The tax ratio generally measures the tax efficiency, it is the ratio of total tax revenue collected over the national income. The tax ratio has been rising constantly from 2002 to 2006 showing improvement in tax collection and tax law implementation, and then it falls gently to 2009, 25

where it then rises again. Though there was an increase in the tax ratio, it then remains that tax ratios are lower in developing nations than in developing nations where it averages 38 per cent.

4.2 AVERAGE TAX BUOYANCY (REGRESSION) An average tax buoyancy of 0.756 has been obtained after running the regression equation of total tax revenue against the national income. This magnitude implies that the tax system is generally less responsive to changes in national income for the period under study. This poses that the tax system in Zimbabwe is not efficient and policy makers should device certain policies that ensures efficiency in revenue collection. It also shows that ZIMRA, which is responsible for collecting revenue and enforcing tax laws is failing to collect tax revue to the maximum possible level. However, the use of averages over such a period may not give proper results but just signifies the possible happenings in the tax system.

The average buoyancy result is not different from what Kusi (1998) obtained for Ghana for the pre-reform period. Kusi (1998) obtained a tax buoyancy magnitude of 0.72, concluding that before reforms the tax system in Ghana has been less responsive and hence inefficient. However, after reforms the Ghana tax system recorded a buoyancy of 1.29, and this shows that reforms had contributed significantly to tax performance. The Divisia index methodology has been used by Milambo (2001) to study the revenue productivity of the Zambian tax structure for the period 1981 to 1999. The results showed elasticity of 1.15 and buoyancy of 2.0, which confirmed that the tax reforms had improved the revenue productivity of the overall system. However, these results were not reliable because time trends were used as proxies for discretionary changes.

Using this average buoyancy method, the Zimbabwean tax system has not changed much even though there has been some reforms undertaken by government on tax issues. It then remains that, either better policies are to be implemented or proper implementation of current policies is to be done. Inefficiency remains to be addressed as it has been pointed that GDP statistics in the national accounts is underestimated just because of lack of capacity to define income for tax purposes, for example, income from the informal sector remains hard to define and measure. 26

4.3 ANNUAL TAX BUOYANCY Annual Tax buoyancy which has been calculated as the responsiveness of tax revenue to changes in national income is presented below. A period before the formation of ZIMRA has been included just for basic comparison purposes.
Table 4: Annual Tax Buoyancy For Period 2000 2010.

YEAR TAX BUOYANCY

2000

2001

2002 0.695

2003 0.696

2004

2005

2006

2007

2008

2009

2010

0.491 0.475

0.974 0.969 0.872 0.712 0.954

0.911 0.843

From Table 4 above it can be noticed that the level of tax buoyancy has been below unitary for the period under study. It can be concluded that the set up of the ZIMRA in September 2001, managed to raise tax performance slightly but not to acceptable levels of efficiency. The peak level of buoyancy was reached in 2004, at a level of 0.974. Graphical analysis helps us identifying the general trend and it aids forecasting. Annual tax buoyancy trend can be represented graphically in Figure 4 as follows.

Figure 4: Annual Tax Buoyancy for Period 2000 2010.

From Figure 4 above it can be seen that annual tax buoyancy has been slowly rising from 2000 reaching peak in 2004, it thereafter slightly maintains in 2005, and then started falling till 2007 27

when it slowly rises again but not as much higher any longer. Generally inefficiency has been proved as for the whole period tax buoyancy has been below unitary. This implies that the tax system is less responsive to changes in national income.

4.4 TAX ELASTICITY Using the Proportional Adjustment Method, the regression coefficient representing tax elasticity, has been found to be of magnitude 0.6784. This shows that the tax system is inelastic. Given that tax policy has not been changing much, such a magnitude denotes inefficiency. The magnitude shows that there is a gap between policy release and policy implementation. Such gaps/lags may be caused by either the MOF delaying passing of policy to ZIMRA or failure of the Authority to adjust and apply the policy/tax law. In some cases policy rejection by clients may be experienced.

Regression results are presented in Table 5 below and discussion of regression results follows thereafter.

Table 5: Ordinary Least Squares Regression (Proportional Adjustment Method) Dependent Variable: Natural log Tax Revenue Coefficient Value t-statistic Probability Elasticity (B) Constant 0.6784 12762.112 6.26 2.71 0.000*** 0.024**

F( 1, 9) = 39.21 Prob > F = 0.0001*** R-squared = 0.8133 Adj R-squared = 0.7926 **Denotes statistical significance at 5%, *** at 1%.

The F statistic 39.21 (0.0001***) shows that the model is correctly specified and that the null hypothesis of variable inclusion is rejected at the 1% level of significance and we therefore conclude that the model is correctly specified.

The estimated model also shows an Adjusted R-squared of 0.7926, which is a reasonable magnitude. It shows that about 80% variation in tax revenue is explained by fluctuations in the national income (GDP). This just leaves a few more factors to affect tax revenue levels.

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The coefficient of changes in national income (which is termed elasticity in this case) is of magnitude 0.6784 and is significant at 1% level. The economic meaning for the coefficient is that when national income changes by a dollar, tax revenue also changes by about 67.84 cents. This definitely shows that the tax system in Zimbabwe is not responsive to changes in national income. A study of the Tanzanian tax system by Osoro (1993) also obtained elasticity of 0.76, and the conclusion was that tax reforms have failed to raise adequate tax revenue for the country. Tax elasticity has been estimated using the proportional adjustment method in a study by Chipeta (1998). He evaluated the effects of tax reforms on tax yields in Malawi for the period 1970-94. The results revealed a tax elasticity of 0.6. The study concluded that the tax bases had grown less rapidly than GDP. Differing results have been obtained in Ghana, where elasticity was above unitary. Kusi (1998) studied tax reform and revenue productivity of Ghana from 1970 to 1993. Results showed a prereform elasticity of 0.71 for the period 1970-82. The period after reform (1983-93), showed increased buoyancy elasticity of 1.22. The study concluded that reforms had contributed significantly to tax performance.

4.5 CONCLUSION In this chapter we have calculated, estimated and interpreted regression results in an effort to determine the tax performance, tax law implementation levels and ability to capture income for tax purposes for the Zimbabwean economy. The analysis has been done through analyzing the ZIMRA efficiency levels, as it is the one in charge of implementing tax laws and collecting revenue from relevant sources. The measures of tax performance, namely buoyancy and elasticity, indicated poor performance of the tax system. These findings are the basis for policy prescriptions to be outlined in the next chapter.

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CHAPTER FIVE RECOMMENDATIONS AND CONCLUSION

5.0 INTRODUCTION This chapter contains a detailed conclusion to the study and also some policy lessons drawn from the empirical results of the previous chapter.

5.1 CONCLUSION The study has attempted to examine the level of tax performance for the tax system in Zimbabwe using measures of tax performance namely elasticity and buoyancy. It has been found that the tax system in Zimbabwe is less responsive to national income changes, implying that the relevant tax collection tools and policies are failing to utilise increase in national income. A trend analysis has been used to identify the annual efficiency levels of the tax system. The trend has shown that for the period under4 study, not even a in a single year has the tax system performed to acceptable levels. Comparison has been made with other countries, and this shows improvement in tax performance where reforms have been undertaken, Zambia and Ghana have managed to show buoyancy levels that are above unitary for post-reform periods. Constant tax reforms in Zimbabwe showed slight improvements, but however in the inefficient quadrant.

Although ZIMRA has proved to be efficient in collecting tax revenue through surpassing the Ministry of finance target, the study managed to show that the level at which it is operating is not the possible level, actually it is below potential level of the economy. This is mainly caused by both internal and external factors. Factors like policy implementation gaps, staff shortages, corruption and implementation tools have been cited as undermining the performance of the Authority.

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A tax ratio has been used as a complimentary tool in analysing tax efficiency. The tax ratio for each for the period under study has been calculated and low levels have been noticed. Due to the issue of GDP in developing nations being underestimated, it has been pointed that the estimates of the tax ratios do not correctly represent level of tax performance, rather they are overstated. This implies that there is poor tax performance in Zimbabwe. Comparison with the developed world has been done, of which the tax ratio for the developed world of 38.4% is greater. This result is not expected as developing world relies on revenue from taxes more than the developed world which has many sources for public spending sponsoring.

5.2 POLICY RECOMMENDATIONS Since research findings suggest that the national income in understated and that developing nations generally concentrate on collecting tax revenue from the easy-to-tax sectors, it is recommended that there should be tax base broadening to capture income from the informal sector and other sectors that are under-taxed. Policy makers may base their tax base broadening using the Haig-Simons-Hicks definition of income, which tries to capture every taxable income. Through understanding and implementing the HSH definition of income tax efficiency may be improved.

The study indicated that ZIMRA is less efficient than it being compared to Ministry of Finance targets. Internal and external challenges facing ZIMRA should be addressed. Adequate tax law implementation tools should be made available, and these include adequate training, funds and appropriate degree of autonomy to government intervention. Time lags between policy publishing and policy implementation should be minimised.

The study also recommend for improvement in tax administration through appropriate reforms, invest in the improvement of infrastructure to facilitate the collection of taxes and stable macroeconomic environment. Improvement in tax administration will produce efficient taxing systems which discourages tax evasion and the growth of the hidden economy.

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Policy makers are encouraged to avoid policy reversals in the economy, since these has bee common during the period under study. Relevant authorities should be supportive to tax legislation and its implementation and avoid political interference in tax issues.

Since the study indicates that by meeting Ministry of Finance target does not guarantee that ZIMRA is efficient in collecting tax and implementing tax laws, the Authority should seek ways of addressing both internal and external factors that are hindering its performance. ZIMRA is on the ground and this should help it pointing where challenges to tax law implementation are originating. Continuous feedback to the relevant authorities is encouraged for ZIMRA. Some required measures are adequate staff training, tax law implementation tools and incentives for workers to reduce staff turnover.

5.3 FUTURE AREAS OF RESEARCH The current study concentrated on overall tax system, which means that the policy suggested are based on the general side. However if tax buoyancy and elasticity could be calculated on individual taxes, areas of great emphasis will be better identified since there are many taxes at hand. The major constraint of this research remains the time frame.

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