Taxes, Employment Growth and Firm Behavior in Uganda

Abstract

Chapter 1 studies the relationship between corporate effective tax rates and firm size, where firm size. After accounting for structural differences of firms, such as profits for tax purposes, the nature of their economic activity, and other time-invariant characteristics, within-firm variation is used to estimate the effect of firm size on effective tax rates. The results reveal a negative effect of firm size on effective tax rates. This negative effect is robust to correction for outliers, and it persists when allocation to the large or the medium taxpayers’ offices are used as instruments for firm size. In addition, there is evidence that supports a non-linear relationship. Chapter 2 focuses on estimating the impact of increases in excise tax rates on firms’ sales revenue, firm profits, and government excise tax revenue in Uganda. In this chapter, tax returns data for four financial years are used to estimate the effect of changes in excise tax rates on specific goods on firms’ reported sales revenue and profits. While allowing for non-parallel linear trends, the effect of the change in excise tax rates is estimated by comparing outcome variables of treated firms to those of the comparison group. The results suggest that the sales revenue for treated firms decreased by 11 percent and 20 percent in the first and second years post-tax change, respectively, relative to the comparison group firms. Firms’ profits for treated firms also decrease on average, by 27 percent in the years post-tax change. Given the decreases in sales revenues and profits, the evidence in Chapter 2 suggests that government tax revenues from treated products significantly decreased by 83 percent relative to excisables whose tax rates were not changed. Chapter 3 investigates how formal employment growth varies by firm size. Using business income tax returns data from Uganda, this chapter presents ordinary least squares estimates to investigate how employment growth varies with firm size and age. The main findings suggest that, contrary to what has been found for U.S. firms, employment growth increases with firm size in Uganda even after controlling for firm age and other firm-specific characteristics.