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.
Effective Tax Rates and Firm Size
With Pierre Bachas, Roel Dom and Camille Semelet
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
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: Lessons from Administrative Tax Data
With Pierre Bachas, Pablo Garriga and Camille Semelet
Earlier Working Paper written during the pandemic in 2020
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
Most low-income countries lack high-frequency firm-level data to monitor the effect of economic shocks in real time. We examine whether administrative tax data can help fill this gap, in the context of the COVID-19 pandemic. In spring 2020, we used the full population of corporate tax returns for 2019 in six developing countries to predict the effect of COVID-induced shocks on formal firms' activity. Comparing the predictions to the realized 2020 data, we find that firms were more resilient than predicted: the share of unprofitable firms increased by only 7 percentage points, while aggregate profits and taxes paid remained stable. The simulations failed to anticipate that labor and capital inputs would flexibly adjust and that large firms would be very resilient. Complementing our simulations with higher-frequency VAT data would have markedly improved predictions.
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
I discussed this project in a keynote lecture on urban public finance at the WB-GWU Sustainable Cities Workshop
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
I discussed this project in a keynote lecture on urban public finance at the WB-GWU Sustainable Cities Workshop
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