Working Papers
Electronic Payment Technology and Tax Compliance: Evidence from Uruguay's Financial Inclusion Reform
With Magaly Sáenz Somarriba
Revise and Resubmit, American Economic Journal: Economic Policy
Does the digitization of transactions in an economy increase tax compliance? We study the effect of financial incentives on the adoption of electronic payment technology and on tax compliance by firms. Exploiting administrative data and policy variation from Uruguay, we show that i) consumer VAT rebates for credit and debit card transactions trigger an immediate 50% increase in the number of card transactions, ii) firms' use of card machines increases only on the intensive margin, and iii) tax compliance is unaffected. Endogenous card machine adoption and a low share of card sales in total reported sales can rationalize the findings.
Does the Value-Added Tax Add Value? Empirics Meets Theory
With Miguel Almunia, Giulia Mascagni, Vedanth Nair and Mazhar Waseem
In preparation for the Journal of Economic Perspectives
The VAT is a cornerstone of the modern tax system. It has many desirable properties in theory: it does not distort firms' production decisions, it is difficult to evade, and it generates a substantial amount of revenue. Yet, in many countries, there are discrepancies between the textbook model of the VAT and its practical implementation. Where the VAT implementation diverges from its textbook model, the tax may lose many of its desirable properties. To examine the implementation of the VAT and identify key shortcomings, we analyze a set of statistics that can be computed for a large and diverse group of countries drawing on firm-level administrative tax records. We document widespread departures from the textbook VAT model, which are correlated with the level of economic development. We discuss the effects on VAT performance and compare the VAT to alternatives, including a retail sales tax and a turnover tax.
Taxing Property in Developing Countries: Theory and Evidence from Mexico
With Alejandro Estefan, Karina Ramirez and Juan Carlos Suárez Serrato
Coverage from VoxDev | Premio Citibanamex de Economía 2020 | ADB-IEA Innovative Policy Research Award 2023
Submitted
We study the most under-utilized tax in developing countries---the property tax---by modeling and estimating the welfare effects of tax rate changes and enforcement. The model shows tax hikes impact welfare by reducing compliance and exacerbating liquidity constraints. Enforcement impacts welfare by subjecting non-compliant taxpayers to threats of fines and property seizure. Empirically, administrative data, sharp tax rate increases, and an enforcement experiment show both policies increase revenue. Tax hikes raise welfare since revenue gains surpass liquidity costs. Enforcement reduces welfare as threat costs overshadow revenue increases. Governments can enhance welfare by raising tax rates rather than escalating enforcement.
Effective Tax Rates and Firm Size
With Pierre Bachas, Roel Dom and Camille Semelet
Submitted
This paper provides novel evidence on the relationship between firm size and effective corporate tax rates (ETRs) using full-population administrative tax data from 13 countries. In all countries, small firms face lower ETRs than mid-sized firms due to reduced statutory tax rates and a higher propensity to register losses. In most countries, ETRs fall for the largest firms due to the take-up of tax incentives. As a result, a third of the top 1% of firms face ETRs below the global minimum tax of 15%. The minimum tax could raise corporate tax revenue by 27% in the median sample country.
Taxation, Information and Withholding: Evidence from Costa Rica [Appendix]
With Marco Hernandez
Coverage from La Nación | Winner of the World Bank Innovation Prize
Submitted
Withholding of taxes by employers and by firms' trading partners is common around the world, but absent in public finance theory. We demonstrate the surprising power of withholding as a tax collection instrument, studying a scheme in Costa Rica where credit-card companies withhold tax on card sales. Doubling the withholding rate increases sales tax remittance among treated firms by 32 percent and aggregate revenue by 8 percent, although the statutory tax rate and third-party reporting requirements remain unchanged. We identify the mechanisms driving this effect and show that the current withholding rate is below the welfare-maximizing rate.
The Impact of COVID-19 on Formal Firms: Micro Tax Data Simulations Across Countries
With Pierre Bachas and Camille Semelet
Coverage from the Economics Observatory | UCL Stone Centre | Replication Code | Country-specific background notes: Albania, Costa Rica, Ecuador, Eswatini, Ethiopia, Guatemala, Montenegro, Rwanda, Senegal, South Africa, Uganda
Estimating the realized impact of COVID-19 in Honduras using monthly VAT data
We are currently updating the paper to compare our simulations to the realized impact of COVID-19.
How is the COVID-19 pandemic affecting firm profits and tax payments in developing countries? This paper uses administrative corporate tax records from 10 low- and middle-income countries around the world to provide plausible estimates. Modeling the lockdown-triggered revenue shock with simple and transparent assumptions, the analysis predicts that less than half of all firms will remain profitable by the end of 2020, about 5–10 percent of the formal aggregate annual payroll will be lost, and firm exit rates will double. As a result, it is expected that tax revenue remitted by the corporate sector will fall by at least 1.5 percent of baseline gross domestic product. Differences in sectoral composition and firms’ cost structures generate heterogeneity in the results across countries: wage subsidies are less effective in low-income countries and government revenue losses are smaller.
Selected Works in Progress
How to Target Enforcement at Scale? Evidence from Tax Audits in Senegal
With Pierre Bachas, Alipio Ferreira and Bassirou Sarr
Supported by two EDI grants (pilot and scale-up)
AEA RCT Registry | Blog
Developing economies are characterized by limited compliance with government regulation, such as taxation. Resources for enforcement are scarce and audit cases are often selected in a discretionary manner. We study whether the increasing availability of digitized data help improve audit targeting. Leveraging a field experiment at scale in Senegal, we compare tax audits selected by inspectors to audits selected by a risk-scoring algorithm. We find that inspector-selected audits are more likely to be conducted, to uncover tax evasion and to detect larger amounts of evasion. We show, however, that the tax administration invests less manpower in algorithm-selected cases, and that algorithm-selected audits may generate less corruption, based on survey results. In ongoing work, we attempt to unpack the algorithm's (dis)functioning and the relevance of human capital in the audit selection and implementation process.
Supported by two EDI grants (pilot and scale-up)
AEA RCT Registry | Blog
Developing economies are characterized by limited compliance with government regulation, such as taxation. Resources for enforcement are scarce and audit cases are often selected in a discretionary manner. We study whether the increasing availability of digitized data help improve audit targeting. Leveraging a field experiment at scale in Senegal, we compare tax audits selected by inspectors to audits selected by a risk-scoring algorithm. We find that inspector-selected audits are more likely to be conducted, to uncover tax evasion and to detect larger amounts of evasion. We show, however, that the tax administration invests less manpower in algorithm-selected cases, and that algorithm-selected audits may generate less corruption, based on survey results. In ongoing work, we attempt to unpack the algorithm's (dis)functioning and the relevance of human capital in the audit selection and implementation process.
The Fiscal Contract up Close: Experimental Evidence from Mexico City
With Francisco Garfias and Juan Carlos Suárez Serrato
AEA RCT Registry
When governments cannot perfectly enforce taxation, they may seek to exchange services for voluntary citizen tax compliance. This fiscal contract requires that tax morale responds to public service provision. In this paper, we present experimental evidence of the impact of local public infrastructure on tax compliance, leveraging a large public investment experiment and individual property tax records from Mexico City.
AEA RCT Registry
When governments cannot perfectly enforce taxation, they may seek to exchange services for voluntary citizen tax compliance. This fiscal contract requires that tax morale responds to public service provision. In this paper, we present experimental evidence of the impact of local public infrastructure on tax compliance, leveraging a large public investment experiment and individual property tax records from Mexico City.
Fiscal Externalities: Evidence from Tariff Reforms and Domestic Production Networks
With Pierre Bachas, Anders Jensen and Gabriel Tourek
Dynamics of Formal Employment Across Countries
With François Gerard and Gabriel Ulyssea