Taxpayer Response to Greater Progressivity: Evidence from Personal Income Tax Reform in Uganda

We evaluate a major personal income tax reform in Uganda that came into effect in 2012–13, contributing to the scarce literature on the effects of personal income tax reform on employees’ income in a low-income country in Africa. The reform increased the tax-free lower threshold, increased tax rates for higher incomes, and introduced an additional highest tax band. Using the universe of pay-as-you-earn (PAYE) administrative data submitted by employers in the formal sector to the Uganda Tax Authority, we analyse the impact of the introduction of the additional top tax band on taxable income. Our results indicate that the elasticity of taxable income in Uganda is somewhat larger than in developed countries, a result particularly driven by income earners at the very top. We find suggestive evidence of income shifting between wages and dividends. Taxpayers in the lower part of the wage distribution also responded to the reform but to lesser extent. Despite the large elasticity of taxable income at the top, the additional revenue generated from the introduction of the additional top tax band by far offset the revenue losses triggered by the more generous tax-free threshold for low taxable incomes and the behavioural response along the distribution.