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taxation

How do entrepreneurs in the poorest countries navigate taxes? Guest post by Gabriel Tourek

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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.

Can Wealth Taxation Work in Developing Countries? Guest post by Juliana Londoño-Vélez

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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.

A cheap intervention that helped partially formalize firms and increased profits – just don’t ask about taxes

David McKenzie's picture
Governments have at least four reasons to try and bring firms into the formal system:
  1. To broaden and increase the tax base
  2. 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)
  3. To increase the sense of rule of law by having the default be that everyone is obeying the law
  4. 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.

How do household contributions to public goods respond to cash transfers? Guest post by Michael Walker

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This is the eighteenth and final entry in this year's job market series. You can read them all here
 

A central question in development economics is how to fund public goods. Informal taxation, whereby households make direct contributions to local public goods (such as water resources, roads and schools) outside of the formal tax system, is an important source of funding for public goods in many low-income countries, especially Kenya (Olken and Singhal 2011, Ngau 1987, Barkan and Holmquist 1986). Informal taxes are coordinated and collected by local leaders and enforced via social sanctions rather than the state. In a formal tax system, legal statutes dictate how taxes change with household income. But how does informal taxation respond to changes in household income?  

My job market paper first quantifies informal taxation in Kenya. Using household panel data, I estimate informal tax schedules over the income distribution and test whether informal taxes respond to changes in earned income. Second, I estimate how informal taxation and public goods respond to a large, one-time increase in income from a randomized unconditional cash transfer program targeting poor households.   

Taxing Clients? How Clientelism Hurts Citizen Tax Morale in Benin: Guest post by Sanata Sy-Sahande

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This is the seventh in this year’s job market series.
Developing countries regularly underperform in their capacity to collect taxes, with tax revenue to GDP ratios that are 20 to 30 percent less than those of high-income countries (Besley and Persson, 2014). This tax capacity gap represents lost revenue that could have provided much-needed public goods and services while reducing reliance on foreign aid. This issue is especially relevant in Africa, where “shadow economies” comprise up to 75% of national GDP (Schneider and Enste 2000), indicating that large swaths of these countries’ populations manage to evade taxation. What accounts for this failure to convince citizens to pay taxes?
 
Structural roadblocks to tax collections in developing countries include poor service quality, dysfunctional bureaucracies, and outdated equipment. In contrast, my job market paper provides a political explanation centered on clientelism, or politicians' exchange of targeted goods for votes from loyal supporters.

No participation without taxation? Evidence from randomized tax collection in the D.R. Congo: Guest post by Jonathan Weigel

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This is the first in this year’s series of posts by PhD students on the job market. Reminder that submissions close this Wednesday at noon.
 
Good political institutions are thought to be essential for sustained economic development (Acemoglu et al., 2016). But where do inclusive, accountable institutions come from? One prominent explanation centers on taxation (Schumpeter, 1918; Besley and Persson, 2009, 2013). Historically, when states began systematically taxing their populations to pay for wars, citizens protested fiercely, demanding public goods and political rights: “no taxation without representation.” This process triggered the co-evolution of tax compliance, citizen participation in politics, and accountable governance. Today, policymakers often promote taxation in developing countries to jumpstart this same virtuous cycle. “Bringing small businesses into the tax net,” writes the IMF, “can help secure their participation in the political process and improve government accountability” (IMF, 2011).

Doing Experiments with Socially Good but Privately Bad Treatments

David McKenzie's picture
Most experiments in development economics involve giving the treatment group something they want (e.g. cash, health care, schooling for their kids) or at least offering something they might want and can choose whether or not to take up (e.g. business training, financial education). Indeed among the most common justifications for randomization is that there is not enough of the treatment for everyone who wants it, leading to oversubscription or randomized phase-in designs.