Working Papers
Taxing Property in Developing Countries: Theory and Evidence from Mexico
With Alejandro Estefan, Karina Ramirez and Juan Carlos Suárez Serrato
Revise & Resubmit, American Economic Journal: Applied Economics
Coverage from VoxDev | Premio Citibanamex de Economía 2020 | ADB-IEA Innovative Policy Research Award 2023
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.
The Fiscal Contract up Close: Experimental Evidence from Mexico City
With Francisco Garfias and Juan Carlos Suárez Serrato
Can the provision of public goods strengthen the fiscal capacity of governments in developing countries and move them toward an equilibrium of widespread tax compliance? We present 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. Despite the salience and large effects of these investments on access to infrastructure, property values, and local economic development, we find no changes in property tax compliance and can rule out even small increases. These null effects persist even when taxpayers are reminded about the tax-benefit link.
Effective Tax Rates, Firm Size and the Global Minimum Tax
With Pierre Bachas, Roel Dom and Camille Semelet
Coverage from UCL Stone Center | Let's Talk Development
We document new facts on corporate taxation and the revenue potential of corporate minimum taxes, leveraging firm-level tax returns from 16 countries. First, effective tax rates (ETRs) follow a hump-shaped pattern with firm size: small firms benefit from reduced rates, while large firms take up tax incentives, leaving mid-sized firms with the highest ETRs. On average, the ETR for the largest 1% of firms is 2.2 percentage points lower than the average ETR for top decile firms. Second, although statutory tax rates are above 15% in all sample countries, over a quarter of top firms face an ETR below 15%, challenging the simple tax haven vs non-haven dichotomy. Third, a simple 15% domestic minimum tax for the top 1% firms could raise corporate taxes by 14% on average across countries, absent behavioral responses. In contrast, the global minimum top-up tax would only raise a quarter of this revenue due to its generous deductions and a smaller number of firms in scope.
Taxation, Information and Withholding: Evidence from Costa Rica [Appendix]
With Marco Hernandez
Coverage from La Nación | Winner of the World Bank Innovation Prize
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.
Selected Works in Progress
Algorithms and Bureaucrats: Evidence from Tax Audit Selection in Senegal
With Pierre Bachas, Alipio Ferreira and Bassirou Sarr
Supported by two EDI grants (pilot and scale-up)
AEA RCT Registry | Blog
Can algorithms enhance the work of bureaucrats in developing countries? Developing economies are often data-poor environments, where individual bureaucrats have substantial discretion over key decisions, such as selecting taxpayers for audits. Exploiting a trove of newly digitized micro-data, we conduct a field experiment across tax offices in Senegal whereby half of the annual audit program is selected by tax inspectors and the other half is selected by a risk-scoring algorithm. We find that inspector-selected audits are 18 percentage points more likely to be conducted and detect 89% more evasion. Algorithm-selected audits are less cost-effective and do not generate less corruption. Even an ex-post optimized algorithm trained on audit outcomes would have increased aggregate detected evasion by only 20% compared to the inspector selection. This is consistent with the inspectors’ high skills, the complexity of the task and the imperfection of the available data.
Supported by two EDI grants (pilot and scale-up)
AEA RCT Registry | Blog
Can algorithms enhance the work of bureaucrats in developing countries? Developing economies are often data-poor environments, where individual bureaucrats have substantial discretion over key decisions, such as selecting taxpayers for audits. Exploiting a trove of newly digitized micro-data, we conduct a field experiment across tax offices in Senegal whereby half of the annual audit program is selected by tax inspectors and the other half is selected by a risk-scoring algorithm. We find that inspector-selected audits are 18 percentage points more likely to be conducted and detect 89% more evasion. Algorithm-selected audits are less cost-effective and do not generate less corruption. Even an ex-post optimized algorithm trained on audit outcomes would have increased aggregate detected evasion by only 20% compared to the inspector selection. This is consistent with the inspectors’ high skills, the complexity of the task and the imperfection of the available data.
Dynamics of Formal Employment Across Countries
With François Gerard, Gabriel Ulyssea, Linda Wu & Coauthors
We study the dynamics of formal employment, using matched employer-employee panels from ten countries at different income levels, and from across states in Brazil and Colombia. We show that increases in formality rates with development are driven by the extensive rather than the intensive margin of formal employment. Countries and regions with higher formality exhibit a higher rate of job-to-job switches and higher returns to tenure. As a result, formal workers in these regions experience higher life-cycle wage growth.
We study the dynamics of formal employment, using matched employer-employee panels from ten countries at different income levels, and from across states in Brazil and Colombia. We show that increases in formality rates with development are driven by the extensive rather than the intensive margin of formal employment. Countries and regions with higher formality exhibit a higher rate of job-to-job switches and higher returns to tenure. As a result, formal workers in these regions experience higher life-cycle wage growth.
Fiscal Externalities: Evidence from Tariff Reforms and Domestic Production Networks
With Pierre Bachas, Anders Jensen and Gabriel Tourek