Kwabena Adu-Ababio’s dissertation: Essays on Social Assistance and Tax Administration in Selected Developing Economies

– Kwabena’s thesis advances our understanding about key timely tax-benefit policy matters in developing countries: how to build social safety nets, which would offer support for individuals suffering from economic shocks, and how to expand the tax nets via bringing in formerly informal firms to finance such policies. In terms of methods, he has trailblazed using microsimulation techniques in developing county contexts and in preparing Zambian tax administrative data for research use, says professor Jukka Pirttilä, who has been Kwabena Adu-Ababio’s supervisor at University of Helsinki.

Trailblazing microsimulation

The first essay of dissertation uses mainly microsimulation approaches to study the policy elements that can be implemented to limit the impact of a systemic shock. The choice of microsimulation stems from the ability of such models to conduct micro-level analysis that singles out the exact role of tax-benefit policies in specific environments where they operate. Although such techniques have been used in a few studies evaluating shock impacts in developed countries, examining several scholarly works reveals that similar analysis still needs to be improved for transitioning economies. The study takes as given the redistributive preferences of policy and tries to ascertain how the poor are or will be protected when there is a marginal (5%) income or demand shock based on the magnitude and composition of automatic stabilization coefficients for Ghana, South Africa, and Ecuador. Moreover, this exercise also serves as a stress test of the existing benefit system. A household’s exposure to risk is measured when there is a crisis with or without government intervention. The study also simulates ways to study how discretionary action has served as welfare contingency to cushion against random shocks statically. The microsimulation approach permits the investigation into the morning-after effects of different types of shocks on household disposable income, holding everything else constant to single out the exact role that automatic stabilizers play.

Close co-operation with Zambian Tax Authority

The second essay of dissertation studies the impact of an administrative tax reform by the Zambian tax authority who, due to informality and poor bookkeeping, changes the reporting mechanism of the Value Added Tax (VAT). The reform is implemented when the Zambian Revenue Authority appoints relatively compliant and public firms as Withholding Agents who collect VAT when purchasing inputs from suppliers. The latter may include firms who were a priori non-compliant or initially compliant but vanished at the end of the transaction chain, exacerbating avoidance or evasion tendencies. The so-called Withholding Value Added Tax (WVAT) reform in practice reduces the lapses which are likely to occur predominantly in developing countries where informal suppliers are usually not found in tax registers. Using a difference-in-differences approach, the study estimates the impact of the WVAT reform implemented to improve revenue generation from suppliers in Zambia on value-added, sales, purchases, and output VAT. After the reform, there are significant positive impacts on those indicators that the withholding agent reports and remits to the tax authority. The study finds a coarse estimated increase in VAT revenue indicating improved compliance as remitting liability changes. This essay was co-authored with Aliisa Koivisto and Andreya Kumwenda,

Domestic revenue loss through deviations in the potential and actual taxes raised by the Zambian Revenue Authority (ZRA) from firm reported VAT and CIT payments is studied in the third essay of the dissertation, co-authored with Aliisa Koivisto and Evaristo Mwale. The bottom-up approach is used to gather estimates as opposed to the top-down approach due to data constraints. The approach permits the use of tax assessments after audits which we classify as evasion rates and the reported returns of the compliant taxpayer population. Before the proposed approach is implemented, there is the need to estimate tax assessments for unaudited firms as the ZRA, like other revenue authorities, does not audit all firms but selects a sub-sample of the taxpaying firms for scrutiny assessments. The study, therefore, tries to predict evasion rates for the unaudited cohort of firms using a Regression and a Machine Learning approach based on the characteristics of audited firms prompting selection into audits. The regression output is based on a standard panel model and estimates total tax gaps at 55%. In contrast, the Machine Learning output is based on an Artificial Neural Network algorithm and assesses total tax gaps at 47%. For deviations in tax type, the study observes that corporate taxes mainly drive the differences. In critical sectors of the economy, the extractives sector records the highest value of CIT gaps compared to VAT gaps.

A PhD journey can be hard

Kwabena Adu-Ababio’s  PhD journey was not always joyous: it involved hard work, dedication, and sacrifice to push oneself to accomplish the set academic milestone – the doctorate in economics. Adu-Ababio’s supervisor Hannu Vartiainen left a lasting impact by saying – paraphrasing John F. Kennedy – that “we chose to do the courses not because they are easy but because they are hard”. This mentality motivated and spurred Adu-Ababio on to pursue the hard things: the demanding GSE courses and the PhD as a whole.

– This doctoral process has been an excellent opportunity to learn and develop myself. With the help of my supervisors and the thesis committee, the bumpy process was smoothened as they encouraged and guided me. With their help, I have achieved this major academic milestone. I have three excellent thesis chapters and many research ideas to develop and ruminate on as an academic, says Adu-Ababio.

Finnish Centre of Excellence in Tax Systems Research warmly congratulates Kwabena Adu-Ababio on the completion of his PhD journey!

Additional information

Email: kwabena.adu-ababio@helsinki.fi

LinkedIn: https://www.linkedin.com/in/kwabena-adu-ababio/

The doctoral dissertation is available at HELDA (University of Helsinki Open Repository): Essays on Social Assistance and Tax Administration in Selected Developing Economies

Photo: Spendstre Fotostore + Studio in Accra.

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