The Ethiopian income tax system: policy, design and practice

Ethiopia used income taxes as one of the principal sources of domestic government revenue since the beginning of modern taxation in the 1940s. The Ethiopian income tax system is "schedular" in structure and orientation, the computation, assessment and collection of income taxes based on some identified sources of income, like income from employment, income from rental of property and income from business. The basic aim of this dissertation is to turn a critical attention to the design and structure of the income tax schedules and test whether the schedules, as they are currently designed, are adequate instruments for achieving the fundamental tax policy goals of Ethiopia. The dissertation uses the four schedules (identified by alphabets "A," "B," "C" and "D") of the "main" income tax system of Ethiopia to test whether the schedular design of the Ethiopian income tax system is adequate for achieving the fundamental aims of equity and administrability. The main finding of the dissertation is that the existing income tax schedules are riddled with a number of gaps as to make them inadequate instruments of the fundamental goals of tax equity and administrability. The basic principles of both horizontal and vertical equity are often observed in their breach both in the income tax laws of and the practice of income taxation in Ethiopia. Drawing upon the numerous cases of discrimination among different categories of taxpayers and sources of income, the dissertation calls for a serious rethinking of the schedular income tax system of Ethiopia. In rethinking the schedular income tax structure of the Ethiopian income tax system, the dissertation recommends two pathways of income tax reform for Ethiopia: the internal reorganization of the income tax system of Ethiopia, which maintains the schedular orientation of the income tax system but requires "internal" changes on a number of levels; and the complete overhaul of the schedular income tax system in light of the alternative models of income taxation developed both in the theoretical literature and the practice of income taxation in both developed and developing income tax systems of the world.