A sub-Saharan African tax commissioner went to buy a bicycle for his son. The seller asked if he would like to get a receipt and pay a 15 percent higher price, or take the bike with no receipt at a lower price. The tax commissioner paused and thought. What would you do?
The irony was hard to miss.
Last month, leaders from the public and private sectors, civil society, international organizations, academia, and the media met at the International Anti-Corruption Conference (IACC) in Copenhagen.
This is the ninth in this year's series of posts by PhD students on the job market.
In low-income countries, small firms account for the majority of taxpayers (World Bank 2011). Yet we know little about how they navigate taxation. Existing research in the developing world focuses mostly on middle-income countries (Pomeranz 2015; Best et al. 2015; Brockmeyer and Hernandez 2018), and there is good reason to think that the tax behavior of firms in the world’s poorest countries might look different. On the one hand, higher credit constraints may undermine entrepreneurs’ ability to meet their tax obligations. On the other, limited resources for tax oversight might create gaps in enforcement that allow firms to evade taxes more easily.
The question of how such firms respond to taxes is a consequential one. It matters both for governments’ ability to raise revenues, in places where funds are much-needed, and for the take-home earnings of large populations of poor entrepreneurs.
My job market paper explores how small firms in Rwanda respond to a change in tax incentives. Rwanda provides a useful setting to study small firms’ tax behavior because such firms comprise 99% of all taxpayers. Rwanda is also a representative low-income country, ranking as 18th poorest in the world (IMF 2018). I focus on entrepreneurs that are earning less than USD $4,000 per year.
This is the first in this year's series of posts by PhD students on the job market.
Developed countries have recently begun considering wealth taxes to raise revenue and curb rising inequality. Should developing countries follow suit? On the one hand, developing countries are often afflicted by acute income and wealth inequality (Alvaredo et al., 2018), and could thus benefit from a more progressive tax system. On the other hand, the question remains whether governments can enforce wealth taxes on an elite that have a vast arsenal of tools to avoid and evade taxes altogether.
My job market paper explores individual responses to personal wealth taxes and enforcement policies in Colombia. Colombia provides a unique opportunity to study these issues thanks to its extensive administrative tax microdata on the assets and debts of wealthy individuals, its numerous tax policy changes since 2002, and its recent enforcement efforts to improve compliance among the rich.
- To broaden and increase the tax base
- To enable firms to access the formal economy and help spur firm growth through the potential benefits of being formal (such as access to financial services and government contracts)
- To increase the sense of rule of law by having the default be that everyone is obeying the law
- To have firms provide information about themselves to the state, which can help the government better understand the structure of the economy and to better target business programs.
The most common way of trying to achieve these aims has been through regulatory reforms that make it easier for firms to formalize. This has taken the form of “one-stop-shops” which have been implemented in at least 115 countries and which enable firms to register both as a business and as a tax entity all at once. However, a number of randomized experiments that have followed such reforms have seen very few informal firms formalize. This raises the question of whether regulatory simplification alone is not enough, and whether trying to achieve all of the above four goals with one instrument causes none of them to be attained.
Separating business and tax registration, and an experiment in Malawi
In a new working paper (replication data) (joint with Francisco Campos), we conducted an experiment with informal firms in Malawi that aimed to test whether governments can bring firms into at least part of the formal system and thereby achieve at least some of the above goals, and whether firms need additional help to realize the benefits of becoming formal.
Enhancing the taxation system in a fair, transparent, and efficient way in the new digital world is essential for countries looking to invest in their human capital, said Karishma Vaswani, Correspondent for BBC Asia Business and moderator of the dynamic event ‘Fair and Transparent Taxation in the Digital Age’ in Bali, Indonesia. Leaders from government, private sector, civil society, and academia gathered to explore the implications of technology on countries’ efforts to mobilize domestic resources to fund the Sustainable Development Goals.
Editor’s note: The findings, interpretations and conclusions expressed herein are those of the authors and do not necessarily reflect the view of the World Bank Group, its Board of Directors or the governments they represent.
For business, the conversation around tax and sustainable development can be tough. Yet
Taxation plays a fundamental role in effectively raising and allocating domestic resources for governments to deliver essential public services and achieve broader development goals.