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, we are able to provide an analysis that is largely comparable with the rest of the literature while also introducing two important innovations. First, we 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. We 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, we account for trade costs more precisely than the previous literature by adjusting the trade gap rather than controlling for proxies. We argue that this new approach to accounting for trade costs is superior to those previously adopted in the literature.

The purpose of this study is to assess the feasibility of building a microsimulation model of the Ethiopian tax and benefits system. We first provide a detailed description of the tax and benefits system of the country. This includes qualifying criteria, tax brackets, and exemptions. We then describe household survey datasets available in the country and examine the nature of these datasets in terms of representativeness, completeness, and panel data structure. Finally, we provide assessments for whether each tax and benefits system can be microsimulated given the rules and the nature of the data available.

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