Cost Recovery by Public Institutions Becomes a Hidden Tax

Jul 25 , 2026.

Ideally, citizens who have paid income tax all year should not have to reach for their wallet again at a public office counter. Yet, in Ethiopia, that appears to have become a routine.

To obtain a birth certificate, register land, renew a business permit or collect a court document, the taxpayer pays a second time, now as a user of the very services income taxes were meant to fund. The state, pressed for money to fill a budget deficit and unable to borrow from the Central Bank, is turning to fees, levies and charges to finance its operations at a time when households and firms are contending with rising costs and falling purchasing power.

It is stating the obvious to say taxation is a pillar of any public finance. However, the steady drift toward charging citizens twice for the same thing is something else. It deserves to be named for what it is.

Understandably, the pressure behind the drift is real. Ethiopia's tax-revenue-to-GDP ratio fell to 7.1pc in the 2023/24 fiscal year, from 7.9pc a year earlier and 8.8pc in 2021/22. It remains one of the lowest in Africa.

For decades, policymakers and tax authorities have been trying to lift it through amended value-added, excise, and income tax laws, digital administration, and stronger enforcement. At some point, during the reign of Melaku Fenta at the helm of the federal tax agency, the ratio picked as high as 13pc.

That ambition is sound, for a state cannot build roads, staff health facilities or pay teachers on a narrow tax base. Domestic revenue mobilisation is the durable answer to a shrinking pool of concessional finance.

The question is not whether the federal government or regional states should collect more, but how, and from whom, and whether the manner of collection quietly corrodes the consent it depends on. For now, the method appears to be doing exactly that.

Businesses and households face higher formal taxes at the same time as rising charges for licences, documentation and public services. Where fees climb faster than the quality of what they buy, taxpayers reasonably read them as duplicate taxation rather than payment for an identifiable benefit.

The design of the base makes matters worse. Transaction-based taxes account for 71.3pc of planned federal collection. Customs duties alone are expected to yield about 785.9 billion Br, 52.7pc of total planned tax revenue. A budget that leans so heavily on trade and transactions is exposed to every shock that affects trade and transactions. The oil price is the immediate example.

Dearer imports may lift the nominal customs value of goods, but they also cut import volumes, compress company margins and weaken the wider taxable activity beneath. Revenue built on that footing is neither stable nor fair.

The deeper problem is what the fee habit does to the character of the state. Public services are not optional purchases. A person cannot obtain a national identity card, a land registration, or regulatory approval elsewhere because the state holds a monopoly over them.

When individuals are compelled to pay whatever tariff is set to obtain something the law obliges them to have, pricing starts to resemble coercion rather than exchange, and the market logic used to defend it collapses. The defence is flimsy still because the charges are so often untethered from cost.

Policymakers try to justify increases on grounds of cost recovery, yet rarely publish the method by which the cost is reckoned.

Citizens are left unable to tell whether a fee reflects a genuine administrative expense or the broader budget hole of the office collecting it. Without that transparency, service charges become a convenient way to raise money outside the ordinary discipline of legislated taxation. Such a convenience rewards the wrong behaviour.

In the public sector, where duplication and weak cost control already dog service delivery, raising fees shifts the cost of inefficiency onto taxpayers. Rather than pressing public institutions to reform, it shields them, financing their shortcomings through the counter instead of through better management.

The same distortion runs through the wider tax mix. Excise duties on tobacco and bottled drinks are meant to raise revenue and shape consumption. But in markets where domestic production is limited and enforcement uneven, setting them too high pushes buyers toward illicit channels and smuggling. Legitimate firms then compete against contraband, and the treasury collects less than it hoped while the informal economy grows. Punitive rates can defeat their own purpose.

Stacking a property tax on top invites avoidance rather than compliance. Herein lies the central fault. Each new charge may look reasonable on its own, yet nobody seems to weigh their combined weight. Taken together, they build a system in which a citizen encounters a tax or fee at almost every point of contact with the state, and frustration, not revenue, becomes the surest yield.

To be sure, fees have a proper place. Cost recovery for a specific and identifiable service is legitimate, and a well-designed user charge can ration a scarce public resource and curb waste.

The federal government’s fiscal position is genuinely tight. No one should pretend the money can be found without effort or discomfort. The objection would not be to charging at all. It is to charging opaquely, cumulatively and in place of the reform that would make the charges unnecessary.

The philosophical inheritance is unambiguous on the point. Taxation is the contribution citizens make in return for security, order and public goods. The premise beneath all of them is that citizens surrender part of their income so that essential services can be provided collectively and fairly.

However, substantial fees layered on top for services no one can refuse begin to pull that bargain apart. Administrative law points the same way. A law draws its legitimacy not from its mere existence but from how it is made and applied. Fee structures set without evidence, transparent calculation or regard for affordability fail that test.

The remedy is not complicated, though it takes resolve. Charges should reflect the real cost of delivery, not the budget gap of the office levying them. The calculations should be published and open to public review. Affordability should be weighed alongside administrative expense in a country where so many live close to the edge.

Those in charge of public agencies should be held to account for their inefficiencies rather than permitted to invoice the public for them. And revenue should be raised through clearly legislated taxes debated in the open, not through the quiet accretion of administrative fees that hides the true state of the public finances.

Taxes, in whatever shape or form they come, should be predictable, equitable and proportionate to the ability to pay.

Citizens pay willingly when they believe institutions are fair, deliver value and manage public money responsibly. They withdraw into the informal economy when the state looks more intent on extraction than on service.

Policymakers and their political bosses can lift one of Africa's lowest tax ratios and maintain the consent of those they tax, but only if transparency, accountability and affordability sit at the centre of the effort. Governance should serve the public interest. It should not invoice the public for the consequences of its own failings.

PUBLISHED ON Jul 25,2026 [ VOL 27 , NO 1369]