Have you ever seen a tax data lab? That is, a room (or virtual room) with high-performance computers analyzing datasets with millions of tax declarations—worker’s income tax returns, firms’ corporate tax returns, or firm-to-firm transaction records.
Sounds complex, right? But within those piles of tax returns are valuable insights that can inform economic policy, address inequality, and even impact global trade. Consider all the important real-life questions and challenges that can be explored using this data.
To harness this potential, we created DaTax—the World Bank’s new tax data lab, to tap into detailed government tax data and address critical policy issues that affect not only tax authorities but also businesses, employers, and workers.
Here’s a few practical examples of the questions DaTax is helping answer:
How much tax do the largest firms actually pay?
The very largest firms have an effective tax rate (ETR) that is significantly lower than the ETR among other large and mid-size firms. In simple terms, this means these large firms often contribute proportionally less in taxes compared to their smaller counterparts.
We realized this when analyzing corporate tax records from 16 different countries. We are now using the insights and methodology from this study to estimate the potential revenue gains from implementing the global minimum tax (OECD pillar 2), which aims to ensure large firms contribute more fairly.
Can Value-Added Tax (VAT) cuts on groceries mitigate the effects of inflation?
Yes, but it’s complicated. Using weekly product-level data from Argentine supermarkets, we found that a temporary VAT cut quickly lowered prices. However, when the cut ended, prices shot up again. Anticipating this, the government put in place anti-profiteering price caps to mitigate the price increase. But the price caps worked only for some products that tend to be consumed more by higher-income households, so wealthier families benefited the most from the lower prices.
Can linking taxes to services improve compliance, service delivery, and public trust?
Together with the government in Punjab, Pakistan, we implemented a series of interventions to strengthen the fiscal contract—by which citizens agree to pay taxes to fund desired services. These interventions, made possible by novel data collected by the property tax department, ranged from eliciting taxpayers’ preferences for local services to earmarking a portion of property tax revenue to be allocated to taxpayers’ neighborhoods according to their preferences.
We found the interventions had positive but small effects on property tax payments and attitudes toward the state despite successful delivery of services and campaigns to raise awareness of the interventions. Our findings point to both the importance of the fiscal contract and the challenges governments face in revitalizing it.
How do top earners make their income?
Most of the income from top earners is not seen in their tax declarations because it is retained inside of firms they own. Working with the Revenue Administration in Honduras, we created a list of corporate shareholders and linked corporate profits to their owners. Among the top 0.1% highest earners, corporate profits represent over half of their income. This suggests that, when considering equity aspects of income tax policy, governments should carefully evaluate what happens in the corporate sector.
In summary, DaTax is helping uncover answers to some of the toughest economic questions, providing governments and policymakers with critical insights that can inform decisions impacting citizens and businesses alike.
Analyzing tax data can be a challenge because of its sensitive nature and huge size. DaTax takes data confidentiality seriously and always works in close collaboration with government partners. We also provide training and capacity building in tax data analysis. In addition, we promote knowledge sharing by developing and distributing codes, semi-aggregate data, and training materials as public goods.
Want to learn more? Visit our website and join the conversation with #DaTaxWB.
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