Information Technology and Fiscal Capacity in a Developing Country: Evidence from Ethiopia

Abstract

Limited fiscal capacity poses a significant challenge in developing countries. Recently, many developing countries have implemented electronic tax systems to improve compliance. However, there is little systematic empirical evidence on the impact. We attempt to narrow this gap using a quasi-experimental evidence from Ethiopia where there has been a recent surge in the use of electronic sales registry machines (ESRM). We use administrative data covering all business taxpayers. We find that ESRM use resulted in a large and significant increase in tax payments (about 20 log points). This effect is driven by firms that are more likely to evade prior to ESRM use. The results highlight the potential role information technology may play in strengthening state capacity in developing countries.