This paper explores the relationship between tax rates and tax evasion in a low-income country context: Ethiopia. By using transaction-level administrative trade data, the authors are able to provide an analysis that is largely comparable with the rest of the literature while also introducing two important innovations.

First, they compare the elasticity of evasion to statutory tax rates and effective tax rates (ETRs). Most studies in the literature so far focused on the former. They show that ETRs are the most relevant parameter to explain evasion in contexts where exemptions are widespread, which results in a large divergence between ETRs and the statutory rates set out in the law.

Second, the authors account for trade costs more precisely than the previous literature by adjusting the trade gap rather than controlling for proxies. They argue that this new approach to accounting for trade costs is superior to those previously adopted in the literature.


Andualem T. Mengistu

Andualem Mengistu is a Technical Advisor at the IMF Fiscal Affairs Department and Director at the Macroeconomic Division at the Ethiopian Development Research Institute.

Kiflu G. Molla

Giulia Mascagni

Giulia Mascagni is a Research Fellow at the Institute of Development Studies and Research Director of the ICTD. Her main area of work is taxation, but she also has research interest in public finance, evaluation of public policy, and aid effectiveness. She is an economist by training, holding a PhD in Economics from the University of Sussex. Her main geographical interest lies in African countries, with a particular focus on Ethiopia and Rwanda.
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