Tax revenue mobilisation in Malawi

This thesis was initially motivated and guided by a general interest in tax revenue mobilisation in Malawi, with a bias towards believing that levels of revenue collection were too low, and a tentative focus on the question of how they could be increased. As the research progressed , and particularly as more attention was paid to comparisons between Malawi and other African countries, my primary interests shifted. It became increasingly clear that Malawi is, in some respects, relatively successful in terms of the amount of tax revenu e collected, and how it is collected. The thesis aims to answer three interrelated questions regarding this success: • Why did the ratio of tax-to-GDP in Malawi increase significantly between 2005-2011, from 10% to 17.5% of GDP? (Note, it has remained high since 2011) • Why, in recent years (since 2009), has the tax-to-GDP ratio been significantly higher in Malawi than in comparable sub-Saharan African (SSA) countries? • Why and how, since 1964 – the first year for which relevant data is available – have the Mala wian tax authorities been able to raise an unusually high proportion of total tax revenue (and total revenue) from direct taxes, i.e., taxes on income (especially Pay As You Earn and not corporate tax). These figures are high for Malawi compared to most S SA countries, and indeed to low-income countries generally. I used a range of methods and approaches to address these questions. The most notable of which are as follows: • A study of historical documents relating to taxation in Malawi. • Cross-country intra-Africa comparisons of ‘tax morale’ using Afrobarometer data. • A survey of business people in Malawi, aimed at understanding their tax morale. • A series of interviews with staff of the Malawi Revenue Authority and other specialists to try to understand how tax es are collected and processed by the Authority in practice. • Statistical analysis to extend and update an influential paper by Mkandawire (2010) that suggests that differences in national tax performance in contemporary Africa, to a large extent, reflect the character of the colonial economy. It was difficult to reach clear answers to the three main research questions. The conclusions of the study are as follows: • The drastic increase in tax-to-GDP ratio between 2005-2011 in Malawi was significantly influenced by the introduction of value added tax (VAT) in 2005, which resulted in improvements in the collection of both direct and indirect taxes. • The higher tax-to-GDP ratio in Malawi compared to other SSA countries since 2009 can be partially explained by the ability of the Malawi Revenue Authority to collect significant revenue from large companies and their employees, despite the use of tax collection methods that appear to be lagging behind technological frontiers. • The ability of the Malawi Revenue Authority (and previous tax administrations) to collect significant revenue from large companies and their employees also explains the high reliance on direct tax in Malawi. This ability is facilitated by Malawi’s economic structure, where income has been concentrated in the hands of a few businesses and individuals, during both the colonial and the post-colonial eras. The thesis contributes to the debate on tax revenue mobilisation in SSA countries by providing evidence from Malawi on how a low-income country with a pattern of tax administration that by normal measures is considered ineffective, is effective in practice. In addition, it contributes to the meagre evidence on the role of the post-colonial political and economic structure in Malawi in making it possible for the government to continue to collect significant revenue, especially through taxing income.