Personal Income Tax Analysis and Revenue Forecasting Paper prepared to present on   Ethiopian Civil Service College & Ethi...
 
Personal Income Tax Analysis and Revenue Forecasting <ul><li>1.	Introduction and statement of the problem </li></ul><ul><l...
1. Introduction and statement of the problem <ul><li>the current income tax law directs every employer how to treat the in...
. . . Introduction and statement of the problem <ul><li>What do we understand from the above rule about factors’ income an...
. .  .  Introduction and statement of the problem <ul><li>For tax policy reasons, tax rules establish that a minimum incom...
. .  .  Introduction and statement of the problem <ul><li>But why did/does the rule oblige that  income  attributable to t...
. .  .  Introduction and statement of the problem <ul><li>As a rule of economies of scale,  </li></ul><ul><ul><li>mobilizi...
. .  .   Introduction and statement of the problem <ul><li>However, the system uses common income tax schedule. Ethiopia’s...
. .  .  Introduction and statement of the problem <ul><li>An input Income Birr 1400 is income tax base falls in the first ...
. .  .  Introduction and statement of the problem <ul><li>But Income Tax base of 1400, total tax revenue of 162.50 and dis...
. .  .  Introduction and statement of the problem <ul><li>Therefore, it is fundamental to develop two complementary income...
. .  .  Introduction and statement of the problem <ul><li>The second objective of the paper is to test the validity of the...
. .  .   Introduction and statement of the problem <ul><li>Thus the study questions are the following:  </li></ul><ul><ul>...
2. Institutional Arrangements of Ethiopia’s Fiscal Year <ul><li>The calendar in use is the Ethiopian (tropical) calendar. ...
. . . Institutional Arrangements of Ethiopia’s Fiscal Year <ul><li>Consequently the first year is different from the follo...
. . . Institutional Arrangements of Ethiopia’s Fiscal Year
. . . Institutional Arrangements of Ethiopia’s Fiscal Year
. . . Institutional Arrangements of Ethiopia’s Fiscal Year
. . . Institutional Arrangements <ul><li>The Tropical/Ethiopian calendar month is a standard division of time where  </li>...
. . . Institutional Arrangements <ul><li>The Ethiopian calendar year begins on Maskaram 1 (12th September) in the first ca...
. . . Institutional Arrangements <ul><li>Therefore, the fiscal year is the government’s 12 months’ accounting period: it o...
3. Data and methodology <ul><ul><li>3.1. Data sources and management </li></ul></ul><ul><ul><ul><ul><ul><li>3.1.1. Data so...
. . . Data and methodology <ul><li>Due to the need to draw on detailed institutional knowledge, the sample period was 15 y...
3.1.2. Data management <ul><li>There are three steps to generate the undiscovered personal income tax revenue data during ...
 
3.2.  Models Specification and  methodology   <ul><ul><li>There are personal income tax schedule and forecasting models in...
. . .  Models Specification   and  methodology   income tax schedule <ul><li>Equation (1.1) states that the first three st...
3.2.2. Forecasting Methodology <ul><li>The PITR trend analysis takes two models: a model that assumes a constant unit chan...
. . . Forecasting Methodology <ul><li>Where  </li></ul><ul><ul><ul><li>PITR Ct,Pt   and Ut   are the common, undiscovered,...
The constant annual rate of growth model of personal income tax revenue, assuming annual compounding, is described a follo...
. . . Forecasting Methodology <ul><li>Equations (3.1), (3.2) , and (3.3) mean that personal income tax revenue during Comm...
Use of constant annual growth rate model involves determining the average historical rate of growth in a personal income t...
. . . Forecasting Methodology <ul><li>Where YC,P, and Uti= PITRC,P, and Ut, ac,p&u= log PITRC,P, and Ut=0; bc,p&u= log (1+...
. . . Forecasting Methodology <ul><li>When t = 0, each model yields the base year personal income tax revenue, i.e. 1983. ...
4. Results and discussions of Complementary Income Tax Schedules     4.1 The first Complementary Income Tax Schedules   14...
4.2 the second  Complementary Income Tax Schedules   1485.00 0.10<ATR  0.13 195.00 135.00 0.15 900.00 (680-1680] 720.00 A...
 
4.3. Discussions on the Complementary Income Tax Schedules <ul><li>Results are two complementary income tax schedules for ...
. . . Discussions on the Complementary Income Tax Schedules <ul><li>The study showed that  </li></ul><ul><ul><li>the input...
5. Results and discussions of Modeling and Forecasting 5.1. Results and of Modeling  a) Simple Linear time trend  Table 5....
. . . Results of Modeling  b) log Linear time trend  Table 5.2 0.000 0.000 0.000 P. Value 0.979 595.34 Est(logPITRU)=2.301...
 
5.2  Results Discussions <ul><li>The t and F statistics test showed that  </li></ul><ul><ul><li>if there is factor payment...
. . .  Results   Discussions <ul><li>Figure 5.2.2 showed that observable undiscovered PITR trend line lies above the adjus...
5.3 Forecasting   <ul><li>Simple trend line analysis: common, undiscovered and universal PITR projections are based on a l...
. . . Forecasting discussion <ul><li>To see why a linear trend relation may be inaccurate, consider the relation between t...
. . . Forecasting discussion <ul><li>In the growth trend  model, 196.79, 2.799, and 199.99 million Birr is the adjusted le...
  . . . Forecasting   table 5.3   1, 523 21. 40 1,501.02 2,296.20 33.65 2,157. 76 2003 1,447 20.35 1,426.86 2,032.54 29.72...
. . . Forecasting discussion <ul><li>The forecast model states that as time increases the undiscovered personal income tax...
. . . Forecasting Findings <ul><li>The constant growth rate forecast model of universal income tax revenue is greater than...
. . . Forecasting Findings <ul><li>The constant growth rate forecast model of universal income tax revenue is greater than...
6.   Conclusion <ul><li>The first complementary tax schedule is broader than the common income tax schedule. It captures t...
… conclusion <ul><li>If there is factor payment during Pagume, the estimated regression line confirms that there is defini...
… Conclusion <ul><li>The constant growth rate forecast model of universal income tax revenue is greater than the common mo...
Ethiopia’s renaissance is true and it begins, all the old does not work. <ul><li>Thank you </li></ul><ul><li>Fassil Tassew...
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Undiscovered Personal Income tax Analysis and Revenue Forecasting [UPITARF]

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Innovating two complementary income tax Schedules and Forecasting the Undiscovered Personal Income Tax Revenue
Abstract
A general problem in today’s Ethiopia is the failure or unwillingness to discover income tax base for a period of Pagume. The non existence of income tax base for Pagume means that there is neither factors income of scarce resources . (salary income to labor, house rent income to the owner of capital building, profit to entrepreneur) nor income tax revenue from the source side. Therefore, in terms of both short run and long run periods, the personal income tax revenue of Pagume remains undiscovered. Because the current income tax schedules do only cover income tax base of common period (360 days=12 months times 30 days).Common period means only the period of 360 days that is less than the universal period of year by the number of days of Pagume. Universal period is a period of year that covers 365 or 366 days once in a leap year.

Nevertheless, the current income tax law verbally directs every employer how to treat the income tax base of Pagume.
“Employers have an obligation to withhold the tax from each payment to an employee, and to pay the withheld amounts to the Tax Authority the amount withheld during each calendar month, in applying preceding income attributable to the months of Nehase and Pagume shall be aggregated and treated as the income of one month.” Income tax law (1994) at 1873

Moreover, according to the above rule, if there is factor income during Pagume, the serious problem is that there are no two complementary income tax schedules available for the accounting department of any budgetary institute that use to estimate, legislate, execute and audit income tax bases of Nehase and Pagume. This means that the economics of Pagume is undiscovered. To discover the undiscovered economics of Pagume, the study makes new income tax theories such that “broadening income tax bases yield more tax revenue to the government and disposable income to the tax payer”. Besides, to translate these new income tax theories into practice, two complementary income tax schedules are innovated for the special period of 35 and 36 days.

The research addresses concepts of universal fiscal year and income tax period. Ethiopia’s fiscal year or income tax period has a set of 12 months: 11 of 30 days and one special month of 35 and 36 days once in a leap year. Tax work is too technical and specialized. Therefore, operational concepts such as income tax brackets, optimum taxable income, marginal tax, total income tax revenue, average income tax and disposable income are explained.

To innovate two complementary income tax schedules for the special period of 35 and 36 days, the study multiplied the current income tax schedule by factors 1.1667(=35/30) and 1.2(=36/30) respectively. This exercise results in the first and second complementary income tax schedules. The first complements the common income tax schedule when t

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Undiscovered Personal Income tax Analysis and Revenue Forecasting [UPITARF]

  1. 1. Personal Income Tax Analysis and Revenue Forecasting Paper prepared to present on Ethiopian Civil Service College & Ethiopian Management Institute ‘ Assessment of the Practices of Civil Service Reform Program in Ethiopia ’ November 18 & 19, 2009 By Fassil Tassew Addis Ababa
  2. 3. Personal Income Tax Analysis and Revenue Forecasting <ul><li>1. Introduction and statement of the problem </li></ul><ul><li>2. Fiscal Year and Operational Concept of personal income taxes </li></ul><ul><ul><li>2.1.Institutional Arrangements of Ethiopia’s Fiscal Year </li></ul></ul><ul><li>3. Data sources and Models Specification </li></ul><ul><ul><li>3.1.Data sources and management </li></ul></ul><ul><ul><ul><li>3.1.1.Data sources </li></ul></ul></ul><ul><ul><ul><li>3.1.2. Data management </li></ul></ul></ul><ul><ul><li>3.2. Models Specification </li></ul></ul><ul><ul><ul><li>3.2.1.Income tax schedule </li></ul></ul></ul><ul><ul><ul><li>3.2.2.Forecasting Methodology </li></ul></ul></ul><ul><li>4. Results and discussions of Complementary Income Tax Schedules </li></ul><ul><li>5. Results and discussions of Modelling and Forecasting </li></ul><ul><li>6. Conclusion </li></ul>
  3. 4. 1. Introduction and statement of the problem <ul><li>the current income tax law directs every employer how to treat the income tax base of Pagume. </li></ul><ul><li>“ Employers have an obligation to withhold the tax from each payment to an employee, and to pay the withheld amounts to the Tax Authority the amount withheld during each calendar month, in applying preceding income attributable to the months of Nehassie and Pagume shall be aggregated and treated as the income of one month.” Income tax law (2002) at 1873 </li></ul>
  4. 5. . . . Introduction and statement of the problem <ul><li>What do we understand from the above rule about factors’ income and income tax revenue during the Pagume period? </li></ul><ul><ul><li>it is the free market principle that, alike any other common period, one who works during the Pagume period deserves to earn income as a fruit of his/her labor, </li></ul></ul><ul><ul><li>the rule does guide that an individual who is required to pay income tax must earn a factor income, </li></ul></ul><ul><ul><li>it is mandatory for the government to mobilize income tax revenue from the source side to finance public goods during the Pagume period. </li></ul></ul>
  5. 6. . . . Introduction and statement of the problem <ul><li>For tax policy reasons, tax rules establish that a minimum income or some part of income is exempt from tax [ Domenicantonio , 2006:7]. </li></ul><ul><ul><li>For administrative convenience the system obliges the employer to withhold the income tax. </li></ul></ul><ul><ul><li>Thus, it is fundamental to apply the pay as you earn (P.A.Y.E.) principle during the Pagume period. </li></ul></ul><ul><ul><li>P.A.Y.E is based on current earnings, so that tax payments proceed as nearly as possible in step with changes in the national money, and a good stabilizing effect is thus obtained [Hicks, 1958:189]. </li></ul></ul>
  6. 7. . . . Introduction and statement of the problem <ul><li>But why did/does the rule oblige that income attributable to the months of Nehassie and Pagume shall be aggregated and treated as the income of one special month? </li></ul><ul><ul><li>The prerequisite for the aggregation may be justified given the vision of Ethiopia’s government. </li></ul></ul><ul><ul><li>The government may highly desire not only to mobilize more tax revenue from broader and the broadest income tax bases to finance development, but also maintain productive efficiency of every organization and address equity. </li></ul></ul>
  7. 8. . . . Introduction and statement of the problem <ul><li>As a rule of economies of scale, </li></ul><ul><ul><li>mobilizing income tax revenue from broader and the broadest income tax bases is by far greater than mobilizing income tax revenue disjointedly from common, narrow and the narrowest income tax bases. </li></ul></ul><ul><ul><li>And, this also may help to reduce the cost of tax administration. </li></ul></ul><ul><ul><li>Besides, preparing only 5 and 6 days Payroll document may cause an average cost of production to increase, and this leads to productive inefficiency. </li></ul></ul><ul><ul><li>Moreover, given 150 Birr is an exemption for 30 days period, a proportional exemption of 25 and 30 Birr for the respective five and six day's period may be considered an insignificant amount to cover the subsistence existence. </li></ul></ul>
  8. 9. . . . Introduction and statement of the problem <ul><li>However, the system uses common income tax schedule. Ethiopia’s common income tax schedule is defined as steps mathematical function that explains steps income tax brackets and marginal tax. </li></ul><ul><ul><li>Steps income tax brackets show the individual tax payer income as steps income tax base, and it is an input for the model. </li></ul></ul><ul><ul><li>Total tax revenue is the vertical sum of optimal unit income tax revenue, and it is an output of the model. Optimum taxable income is equal to the difference between upper and lower income tax limits. </li></ul></ul><ul><ul><li>Optimum unit tax revenue is equal to optimum taxable income multiplied by marginal tax. </li></ul></ul><ul><ul><li>Therefore, Total tax revenue is the vertical sum of optimal unit income tax revenue. </li></ul></ul>
  9. 10. . . . Introduction and statement of the problem <ul><li>An input Income Birr 1400 is income tax base falls in the first three income tax brackets: (0-150), (150-650) and (650-1400) at marginal tax 0, 10 and 15 respectively. </li></ul><ul><li>The output, total tax revenue is equal to 162.50 Birr (= (150-o) 0 %+( 650-150)10 %+( 1400-650)15%). </li></ul><ul><li>The total tax revenue use to finance public goods. </li></ul><ul><li>An implicit disposable income Birr 1237.50 is the difference between total income and total tax payment (= 1400-162.50). </li></ul><ul><li>The tax payer consumer uses the disposable income for spending in the goods market, and saving in the money market. </li></ul>
  10. 11. . . . Introduction and statement of the problem <ul><li>But Income Tax base of 1400, total tax revenue of 162.50 and disposable income of Birr 1237.50 Birr is allocated 12 times in a fiscal year which accounted only for common period(=360 days), and this common period is less than the universal period(=365/6 days ). </li></ul><ul><li>The problem is absence of income tax base during Pagume. Absence of income tax base means there is no factor income, income tax revenue, and disposable income. In turn, these imply that there is no provision of public goods and participation in the goods and money markets. That is why the study termed such period ‘undiscovered period of time’. </li></ul>
  11. 12. . . . Introduction and statement of the problem <ul><li>Therefore, it is fundamental to develop two complementary income tax schedules. In terms of the short period, therefore, the study questions are </li></ul><ul><ul><li>What are the complementary income tax schedules? </li></ul></ul><ul><ul><li>How does broader and the broadest income tax bases yield more tax revenue and disposable income? </li></ul></ul><ul><li>To answer the above questions, the study multiplied the common income tax schedule by factors 1.1667(=35/30) and 1.2(=36/30) respectively. </li></ul>
  12. 13. . . . Introduction and statement of the problem <ul><li>The second objective of the paper is to test the validity of the new universal income tax theory using empirical data( sample period 1984-98),and to forecast (1999-2003). </li></ul><ul><li>Two Variables: </li></ul><ul><ul><li>Personal income tax revenue is dependent variable and </li></ul></ul><ul><ul><li>time is an independent variable. </li></ul></ul><ul><ul><li>The study assumes dependent variable personal income tax revenue </li></ul></ul><ul><ul><ul><li>Common(PITRc), </li></ul></ul></ul><ul><ul><ul><li>Undiscovered (PITRp)and </li></ul></ul></ul><ul><ul><ul><li>Universal(PITRu) period in each fiscal year. </li></ul></ul></ul>
  13. 14. . . . Introduction and statement of the problem <ul><li>Thus the study questions are the following: </li></ul><ul><ul><li>If one uses the actual personal income tax revenue data for projecting, will its future path only be values of the common period in very fiscal year? </li></ul></ul><ul><ul><li>What is the common, undiscovered and universal personal income tax revenue in Birr at the base year and its annual growth rate? </li></ul></ul><ul><ul><li>Is the hypothesis that there is no relationship between personal income tax revenue and Pagume valid? </li></ul></ul><ul><ul><li>Assuming government at all levels (federal, regional and local ) amend and apply these two complementary income tax schedules together with the common income tax schedule, will more tax revenue be generated? </li></ul></ul>
  14. 15. 2. Institutional Arrangements of Ethiopia’s Fiscal Year <ul><li>The calendar in use is the Ethiopian (tropical) calendar. This calendar like the Gregorian calendar is derived from the solar year. The solar year is about a period of 365 ¼ days. </li></ul><ul><li>For human benefit, men designate a year as to have 365 days (for three consecutive years) and 366 days (once in every four-year). This happened because the sum of the quarter day of the first, second, third and fourth year gives one day. </li></ul><ul><li>This day is added to the fourth year to give 366 days, and that year is called leap year. The leap year is precisely different from the three preceding years by one more ending day. </li></ul>
  15. 16. . . . Institutional Arrangements of Ethiopia’s Fiscal Year <ul><li>Consequently the first year is different from the following two years, because it begins a day late. But both the second and third years are similar, in the sense that each of them has identical days of beginning and ending. </li></ul><ul><li>Therefore, naturally observed and scientifically proved, that there are three categories of the calendar year: Category one is the first year , Category two is the second and third years, and Category three is the leap year </li></ul>
  16. 17. . . . Institutional Arrangements of Ethiopia’s Fiscal Year
  17. 18. . . . Institutional Arrangements of Ethiopia’s Fiscal Year
  18. 19. . . . Institutional Arrangements of Ethiopia’s Fiscal Year
  19. 20. . . . Institutional Arrangements <ul><li>The Tropical/Ethiopian calendar month is a standard division of time where </li></ul><ul><ul><li>Maskaram,Tikimit, Hidar, </li></ul></ul><ul><ul><li>Thahisas, Tir, Yekatit, </li></ul></ul><ul><ul><li>Megabit, Miyazia, Ginbot, </li></ul></ul><ul><ul><li>Sene, Hamle and Nehasie, each has 30 days, and </li></ul></ul><ul><ul><li>Pagume, which has 5 or 6 days in a leap year. </li></ul></ul>
  20. 21. . . . Institutional Arrangements <ul><li>The Ethiopian calendar year begins on Maskaram 1 (12th September) in the first category, and (11th September) in the second, third and forth categories; ends on Pagume 5 (10th September) in the first, second and third categories and Pagume 6 (11th September) in the fourth category. </li></ul><ul><li>Therefore, the Ethiopian calendar has 12 months: 11 common months (Meskaram-Hamle) and one special month (Nehasie and Pagume). </li></ul>
  21. 22. . . . Institutional Arrangements <ul><li>Therefore, the fiscal year is the government’s 12 months’ accounting period: it often does not coincide with the calendar year. </li></ul><ul><li>In Ethiopia, the fiscal year runs from Hamle 1 to Sene 30. </li></ul><ul><li>The budget for the forthcoming fiscal year is presented towards the end of Miyazia. The fiscal year that runs from Hamle1, 2001 EC to Sene 30, 2002 EC is called the 2002 EC fiscal year. </li></ul>
  22. 23. 3. Data and methodology <ul><ul><li>3.1. Data sources and management </li></ul></ul><ul><ul><ul><ul><ul><li>3.1.1. Data sources </li></ul></ul></ul></ul></ul><ul><ul><ul><li>For the personal income tax analysis section the data analyzed and complementary income tax schedules developed from the current theoretical monthly income tax law. </li></ul></ul></ul><ul><ul><ul><li>The study presupposed an individual whose common monthly nominal salary income is 1400 birr as the income tax base input. </li></ul></ul></ul><ul><ul><ul><li>For the personal income tax revenue forecasting section, the time series data are obtained from the national budgetary accounts (MoFED) of different fiscal years. </li></ul></ul></ul>
  23. 24. . . . Data and methodology <ul><li>Due to the need to draw on detailed institutional knowledge, the sample period was 15 years (1984-98 E.C). The sample period was determined based on two factors: </li></ul><ul><ul><li>first, during this period the consolidated actual personal income tax revenue data of the federal and regional states are available in the national budgetary accounts, and </li></ul></ul><ul><ul><li>second, the reform in income tax schedules that were made in different years (1984, 1987, and 1994) seemed similar that each income tax law assumed the principle of fiscal neutrality to promote free market economy. </li></ul></ul>
  24. 25. 3.1.2. Data management <ul><li>There are three steps to generate the undiscovered personal income tax revenue data during Pagume over the study period: </li></ul><ul><ul><li>first, collect the actual data, </li></ul></ul><ul><ul><li>second, calculate the average daily actual personal income tax revenue as the ratio of actual income tax revenue data to 360 days; and </li></ul></ul><ul><ul><li>third, multiply the result of the second step by five or six days. </li></ul></ul><ul><ul><li>Finally, a proxy for the universal income tax revenue data of each year over the study period is equal to the sum of the actual income tax revenue data and the undiscovered income tax revenue data </li></ul></ul>
  25. 27. 3.2. Models Specification and methodology <ul><ul><li>There are personal income tax schedule and forecasting models in this study. </li></ul></ul><ul><ul><ul><ul><ul><li>3.2.1. Income tax schedule </li></ul></ul></ul></ul></ul><ul><li>In accordance with the current income tax law of Ethiopia, steps linear income tax equation is defined as a mathematical sentence that establishes steps relationship between income tax revenue and personal income over a period of common month. </li></ul><ul><li>Ti=[150-Y1) 0%+[Y2-150) 10%+[Y3-650) 15%+[Y4-1400) 20%+[Y5-2350) 25%+[Y6-3550) 30%+[Y7-5000) 35%----[1] </li></ul><ul><ul><li>For simplicity, we can take the first three steps from equation (1) so as to get the first three steps linear income tax revenue equation to determine income tax revenue. </li></ul></ul><ul><ul><li>T i =[150-Y 1 ) 0%+[Y 2 -150) 10%+[Y 3 -650) 15%------[1.1] </li></ul></ul>
  26. 28. . . . Models Specification and methodology income tax schedule <ul><li>Equation (1.1) states that the first three steps personal income tax revenue is the three steps function of personal income over a period of the common month. </li></ul><ul><li>To derive the first complementary income tax schedule for a period of 35 days, </li></ul><ul><ul><li>multiply the common income tax schedule by a factor 1.1667 (= 35/30) </li></ul></ul><ul><li>Similarly, to derive the second complementary employment income tax schedule (A 3 ) for a period of 36 days , </li></ul><ul><ul><li>multiply A 1 by factor 1.2 (=36/30) or A 2 by 1.0286(=36/35) </li></ul></ul>
  27. 29. 3.2.2. Forecasting Methodology <ul><li>The PITR trend analysis takes two models: a model that assumes a constant unit change of common, undiscovered and universal personal income tax revenue over time estimated by linear trend equations, and another model that assumes a constant percentage change of the variables estimated by the growth trend analysis. </li></ul><ul><li>We specify the linear relationship between personal income tax and time as follows </li></ul><ul><ul><li>PITR Cti = a c +b cti +e Ci ------------------(2. 1) </li></ul></ul><ul><ul><li>PITR Pti = a P +b Pti +e Pi ----------------- (2. 2) </li></ul></ul><ul><ul><li>PITR Uti = a u +b uti +e Ui ------------------ (2. 3) </li></ul></ul>
  28. 30. . . . Forecasting Methodology <ul><li>Where </li></ul><ul><ul><ul><li>PITR Ct,Pt and Ut are the common, undiscovered, and universal personal income tax revenue in millions of birr respectively at the t th time period, </li></ul></ul></ul><ul><ul><ul><li>a Ct,Pt and Ut is the vertical intercept value of personal income tax revenue in year zero, and </li></ul></ul></ul><ul><ul><ul><li>b Ct,Pt and Ut is the change in personal income tax revenue in millions of Birr per year , finally </li></ul></ul></ul><ul><ul><ul><li>e Ct,Pt and Ut is the error term. </li></ul></ul></ul>
  29. 31. The constant annual rate of growth model of personal income tax revenue, assuming annual compounding, is described a follows: <ul><ul><li>PITR Cti in t years = [PITR Cti , base year] (1+gc)t ---- (3. 1) </li></ul></ul><ul><ul><li>PITR Cti = PITR Cti =0 (1+gc) t </li></ul></ul><ul><ul><li>PITR pti in t years = [PITR Pti , base year] (1+gp) t ---- (3. 2) </li></ul></ul><ul><ul><li>PITR pti = PITR Pti=0 (1+gp) t </li></ul></ul><ul><ul><li>PITR uti in t years = [PITR Uti , base year] (1+gu) t ------ (3. 3) </li></ul></ul><ul><ul><li>PITR uti = PITR Uti =0 (1+gu) t </li></ul></ul>
  30. 32. . . . Forecasting Methodology <ul><li>Equations (3.1), (3.2) , and (3.3) mean that personal income tax revenue during Common ,Pagume and Universal periods in t years in the future are equal to the current period personal income tax revenue PITR Ct=0 , Pt=0, andUt=0 ,compounded at constant annual growth rate, g c,p&u , for a period of t years. </li></ul>
  31. 33. Use of constant annual growth rate model involves determining the average historical rate of growth in a personal income tax revenue and using equations (3.1),(3.2), and (3.3.) to project future values. <ul><li>Therefore, to estimate these growth trend models using ordinary least squares regression techniques; we took the common logarithmic (to the base 10) both sides of the above equations results in the expression follows: </li></ul><ul><ul><li>log(PITR Cti )= log(PITR Cti ) + log (1+g c )xt......................(3.4) </li></ul></ul><ul><ul><li>log(PITR Pti )= log(PITR Pti ) + log (1+g p )xt ..............(3.5) </li></ul></ul><ul><ul><li>log(PITR Uti ) = log(PITR Uti ) + log (1+g u )xt.....................(3.6) </li></ul></ul><ul><li>Note that equations 3.4, 3.5, and 3.6 are expression of the forms of simple linear equations: </li></ul><ul><ul><li>YC ti = a c +b cti </li></ul></ul><ul><ul><li>YP ti = a p +b pti , and </li></ul></ul><ul><ul><li>YU ti = a u +b Uti . </li></ul></ul>
  32. 34. . . . Forecasting Methodology <ul><li>Where YC,P, and Uti= PITRC,P, and Ut, ac,p&u= log PITRC,P, and Ut=0; bc,p&u= log (1+gc,p&u), and t an independent variable time. The coefficients of log PITRC,P, and U and log (1+ gc,p&u) estimated using the least square regression technique by SPSS standard econometric software. These can be transformed back into personal income tax revenue forecast as follows: </li></ul><ul><ul><li>PITR C , years t= antilog PITR Ct=0 antilog (1+g c )t………..(3.7) </li></ul></ul><ul><ul><li>PITR P , years t= antilog PITR Pt=0 antilog (1+g p )t… ....(3.8) </li></ul></ul><ul><ul><li>PITR U years t= antilog PITR Ut=0 antilog (1+g u )t…………(3.9) </li></ul></ul>
  33. 35. . . . Forecasting Methodology <ul><li>When t = 0, each model yields the base year personal income tax revenue, i.e. 1983. </li></ul><ul><li>To forecast 20 years into the future from the base year, one uses t = 20, which enters exponentially in the equations 3.7, 3.8 &3.9 above. Thus, to forecast the PITR in any future year by using this model, 1983 (base year) subtracted from the year being forecast to determine t=20 (=2003-1983), t=19(=2002-1983), and so on [please refer to the constant growth forecast results reported on column 1 of table 5. 3]. </li></ul>
  34. 36. 4. Results and discussions of Complementary Income Tax Schedules 4.1 The first Complementary Income Tax Schedules 1443.78 0.10<ATR  0.13 189.60 131.25 0.15 875.00 (758.36-1633.38] 700.56 ATR=0.10 58.30 58.30 0.10 583.36 (175-758.36] 175.00 ATR=0.00 00.00 00.00 0.00 175.00 (0-175] Disposable income (7)Upper limit (1) minus(5) Average tax (6)=(5)/(upper Income limit (i) minus 150 Birr) Total tax revenue in Birr(5)=Vertical Summation of (4) Unit Income Tax revenue (T i )in Birr at each income Tax bracket(4)=(2)*(3) Marginal Tax (3)=(4)/(2) Taxable Income in Birr(2) Income tax Brackets (monthly employment income-Y i ) in Birr
  35. 37. 4.2 the second Complementary Income Tax Schedules 1485.00 0.10<ATR  0.13 195.00 135.00 0.15 900.00 (680-1680] 720.00 ATR=0.10 60.00 60.00 0.10 600 (180-680] 180.00 ATR=0.00 00.00 00.00 0.00 180.00 (0-180] Disposable income (7)Upper limit (1) minus(5) Average tax (6)=(5)/(upper Income limit (i) minus 150 Birr) Total tax revenue in Birr(5)=Vertical Summation of (4) Unit Income Tax revenue (T i )in Birr at each income Tax bracket(4)=(2)*(3) Marginal Tax (3)=(4)/(2) Taxable Income in Birr(2) Income tax Brackets (monthly employment income-Y i ) in Birr
  36. 39. 4.3. Discussions on the Complementary Income Tax Schedules <ul><li>Results are two complementary income tax schedules for special month of 35 and 36 days. Compared to the common income tax schedule </li></ul><ul><ul><li>the first is broader and </li></ul></ul><ul><ul><li>second is the broadest schedule. </li></ul></ul><ul><li>The first three steps income tax brackets of broader and the broadest income tax bases at 0, 10 and 15 marginal tax are: </li></ul><ul><ul><li>(0-175), (175-758.33) and (758.33-1633.33); and </li></ul></ul><ul><ul><li>(0-180), (180-780) and (780-1680). </li></ul></ul>
  37. 40. . . . Discussions on the Complementary Income Tax Schedules <ul><li>The study showed that </li></ul><ul><ul><li>the input income tax base increases to 1633.33 and 1680, </li></ul></ul><ul><ul><li>an output income tax revenue increases to 189.60 and 195, and </li></ul></ul><ul><ul><li>simultaneously disposable income increases to 1443.75 and 1485 birr. </li></ul></ul><ul><li>Therefore, broadening income tax base yields not only more tax revenue to the government but also more disposables income to the tax payer. </li></ul>
  38. 41. 5. Results and discussions of Modeling and Forecasting 5.1. Results and of Modeling a) Simple Linear time trend Table 5.1 0.000 0.000 0.000 P. Value 0.894 109.17 Est. (PITR U )=17.858 +75.234*t ( (0.273) (10.448) Universal:1984-98 3 0.905 124.13 Est. (PITR P =0.376 +1.051*t ( (0.858) (11.141) Undiscovered:1984-98 2 0.893 108.69 Est. (PITR C =17.876 +74.157t (0.276) (10.425) Common: 1984-98 1 R-Sq F Estimated Regression Line Linear Time Trend No
  39. 42. . . . Results of Modeling b) log Linear time trend Table 5.2 0.000 0.000 0.000 P. Value 0.979 595.34 Est(logPITRU)=2.301+ 0.053*t ( (115.408) (24.393) Universal:1984-98 3 0.969 404.73 Est(logPITRP)=0.447+ 0.054*t ( (18.331) (20.119) Undiscovered:1984-98 2 0.961 318.77 Est. (logPITRC)=2.294+ 0.052*t ( (85.947) (17.855) Common: 1984-98 1 R-Sq F Estimated Regression Line log Linear Time Trend No
  40. 44. 5.2 Results Discussions <ul><li>The t and F statistics test showed that </li></ul><ul><ul><li>if there is factor payment during Pagume, the estimated regression line confirms that there is definitely income tax revenue. </li></ul></ul><ul><ul><li>The hypothesis that there is no relationship between personal income tax and time in Pagume is significantly invalid. </li></ul></ul><ul><ul><li>This means that accepting the alternative hypothesis, i.e. allocating budget and executing income tax during the period of Pagume is legitimate. </li></ul></ul>
  41. 45. . . . Results Discussions <ul><li>Figure 5.2.2 showed that observable undiscovered PITR trend line lies above the adjusted constant growth trend line in the years 4=1987, 8=1991 and 12=1995 respectively. The explanation is those years are leap years when the universal period of time covered 366 days. This is New Finding inquires research </li></ul>
  42. 46. 5.3 Forecasting <ul><li>Simple trend line analysis: common, undiscovered and universal PITR projections are based on a linear trend line, which implies that tax revenue increase by a constant birr amount each year; in this example, common, undiscovered and universal income tax revenue are projected to grow by 74.157, 1.051 and 75.234 million birr per year respectively; </li></ul><ul><li>But there are important reasons for believing that the true trend for common, undiscovered and universal PITR is non linear and that the forecasts generated by this constant change model be relatively poor estimates of actual values. </li></ul>
  43. 47. . . . Forecasting discussion <ul><li>To see why a linear trend relation may be inaccurate, consider the relation between the common, undiscovered and universal actual PITR data and the linear trends shown in figures 5.1.1, 5.1.2 & 5.1.3. </li></ul><ul><li>Each figure shows initially and most recently the observed data is greater than the trend line and in between the observed data is less than the trend line. </li></ul>
  44. 48. . . . Forecasting discussion <ul><li>In the growth trend model, 196.79, 2.799, and 199.99 million Birr is the adjusted level of PITR for t=0, or1983, because the first year of data used in regression estimation=1, was 1984. </li></ul><ul><li>The numbers 1.1282, 1.1324 and 1.1311 equals 1 plus the average rate of growth using annual compounding, is meaning that the common, undiscovered and universal period PITR increased at a </li></ul><ul><ul><li>12.82, </li></ul></ul><ul><ul><li>13.24 and </li></ul></ul><ul><ul><li>13.11 % annual rate from 1984 to 1998 respectively . </li></ul></ul>
  45. 49. . . . Forecasting table 5.3 1, 523 21. 40 1,501.02 2,296.20 33.65 2,157. 76 2003 1,447 20.35 1,426.86 2,032.54 29.72 1,914.06 2002 1,372 19.30 1,352.70 1,799.02 26.24 1,698.32 2001 1,297 18.25 1,278.55 1,592.34 23.17 1,506.68 2000 1,221 17.20 1,204.39 1,409.40 20.46 1,336.65 1999 universal undiscovered Common universal undiscovered Common Simple linear Log linear
  46. 50. . . . Forecasting discussion <ul><li>The forecast model states that as time increases the undiscovered personal income tax revenue during Pagume increases. The growth trend model show that the undiscovered personal income tax revenue was 20.6 million birr in 1999 will increase to 33.65 million Birr in the year 2003. </li></ul><ul><li>The direct forecasts for universal personal income tax revenue rises steadily using the log linear growth compared to a less gradual increase predicted using simple linear trend. If the government uses these new two complementary schedules together with the common, the forecast result shown in the first column 3 of table 5.3 describe that more tax revenue will definitely be mobilized. </li></ul>
  47. 51. . . . Forecasting Findings <ul><li>The constant growth rate forecast model of universal income tax revenue is greater than the common more than 4 times constant growth rate forecast of undiscovered personal income tax revenue. </li></ul><ul><li>For example, compared to the common period PITR forecast model shown at row five on table 5.3., the universal growth trend forecast model yields more PITR by amount of money equal to 138.44 millions Birr(=2,296.20-2,157.76) in the year 2003. This amount is greater than about 4 times the undiscovered PITR forecast in the same year. </li></ul>
  48. 52. . . . Forecasting Findings <ul><li>The constant growth rate forecast model of universal income tax revenue is greater than the common more than 4 times constant growth rate forecast of undiscovered personal income tax revenue. Therefore, one can argue that the universal PITR forecast growth model asserts that broadening the tax base that yields more tax revenue to the government and disposable income to the tax payers in the short run, definitely leads to reduction of debt finance in the long run. Reduction of debt finance is substituted largely by domestic tax revenue finance. </li></ul>
  49. 53. 6. Conclusion <ul><li>The first complementary tax schedule is broader than the common income tax schedule. It captures the income tax base of Nehasie and Pagume. The second complementary income tax schedule is the broadest of all, because it contains one additional day’s income tax base. The first income tax bracket limit increases from 150 to 175 Birr. The broadest schedule exempt threshold income increases to 180 Birr. </li></ul><ul><li>When are common and complementary income tax schedules used? The common and broader income tax schedules should be used when the year has 365 days. The common and broadest income tax schedules should be used when the fiscal year has 366 days. </li></ul>
  50. 54. … conclusion <ul><li>If there is factor payment during Pagume, the estimated regression line confirms that there is definitely income tax revenue. </li></ul><ul><li>Therefore, the hypothesis that there is no relationship between personal income tax and time in Pagume is significantly invalid. </li></ul><ul><li>This means that accepting the alternative hypothesis, i.e. allocating budget and executing income tax during the period of Pagume, is valid. </li></ul>
  51. 55. … Conclusion <ul><li>The constant growth rate forecast model of universal income tax revenue is greater than the common more than 4 times constant growth rate forecast of undiscovered personal income tax revenue. </li></ul><ul><li>Therefore, one can argue that the universal PITR forecast growth model asserts that broadening the tax base that yields more tax revenue to the government and disposable income to the tax payers in the short run, defiantly leads to reduction of debt finance in the long run. Reduction of debt finance is substituted largely by domestic tax revenue finance. </li></ul>
  52. 56. Ethiopia’s renaissance is true and it begins, all the old does not work. <ul><li>Thank you </li></ul><ul><li>Fassil Tassew </li></ul>

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