Taxation and Development
Saturday, Jan. 7, 2017 8:00 AM – 10:00 AM
Hyatt Regency Chicago, Michigan 1A & 1B
- Chair: Nada Eissa, Georgetown University
Taxation, Information and Withholding: Evidence From Costa Rica
AbstractThis paper studies the compliance effect of tax withholding on firms, which is commonly used in developing countries. While a growing literature argues that third-party reporting of tax liabilities is a key mechanism for ensuring tax compliance, and a reason why tax capacity grows along the development path, the literature has ignored the fact that third-party reporting is often associated with tax withholding. Withholding is irrelevant if the tax withheld is fully credited against a taxpayer’s liability, but can increase compliance in the presence of costly reclaim, low salience of enforcement or extensive margin compliance gaps. To demonstrate this empirically, we exploit a ten-year panel of income and sales tax records for 400,000 firms and over 20 million third-party information and withholding reports from Costa Rica. We first document the anatomy of compliance, finding that firms are relatively compliant with third-party reports on the extensive, intensive and payment margin. When subject to third-party reporting for the first time, firms' reported taxable income increases by up to 50%. We then isolate the effect of withholding by exploiting a withholding rate increase that left reporting requirements unchanged. A doubling of the withholding rate lead to a 33% increase in sales tax payment among treated firms and an 8% increase in aggregate sales tax revenue. The mechanisms are a default payment effect and reduced misreporting. The large compliance impact of withholding rationalizes its widespread use in developing countries.
Using Technology to Improve Governance: Evidence From the Introduction of Electronic Tax Filing in Tajikistan
AbstractWe study the impact of technology on governance outcomes, in particular, service delivery, corruption and tax payments, by examining the adoption and subsequent impact of electronic tax filing (e-filing) in Tajikistan. E-filing allows taxpayers to file their taxes online; in its absence, taxpayers submit their monthly tax declarations in-person to tax officials, resulting in high compliance costs and opportunities for rent-seeking behavior. Using a randomized experiment, we find that training firms to e-file and helping them register for e-filing is highly successful at promoting e-filing adoption, as 93 percent of treated firms start to e-file. In contrast, e-filing training alone does not result in any significant difference in adoption compared to a control group with a 59 percent adoption rate. Further, we find evidence of important selection mechanisms: firms reporting extortion from tax officials are more likely to e-file while firms with a higher likelihood of evading taxes (who may benefit from colluding with tax officials) are less likely to e-file. Once firms start to e-file, they spend almost five fewer hours each month complying with tax obligations and are less likely to have tax officials coerce their tax declarations. We find no average significant effects of e-filing on tax payments, but observe significant heterogeneity across firms: among firms with a higher likelihood of evasion (as measured by a risk index developed by the tax authority), firms that e-file pay about $3,600 USD more taxes on average over one year. In all, the results suggest that e-filing helps to close the revenue gap between firms that were likely evading taxes and those that were not.
Employment Structure and the Rise of the Modern Tax System
AbstractThis paper studies how the transition from self-employment to employee-jobs over the long run of development can explain growth in income tax capacity. I construct a new database which covers 90 household surveys across countries at different income levels and 140 years of historical data within the US (1870-2010). Using these data, I first establish three new stylized facts: 1) within country, the share of employees increases over the income distribution, and increases at all levels of income as a country develops; 2) the income tax exemption threshold moves down the income distribution as a country develops tracking employee growth; 3) the employee share above the income tax threshold remains high and constant at 80-85 percent. These findings are consistent with a model where a high employee share is a necessary condition for taxation and where the rise in income covered by information trails through increases in employee shares drives expansion of the income tax base. To provide a causal estimate of the impact of employee share on the exemption threshold, I study a state-led US development program implemented in the 1950s-60s which shifted up the level of employee share. The identification strategy exploits within-state changes in court-litigation status which generates quasi-experimental variation in the effective implementation date of the program. I find that the exogenous increase in employee share is associated with an expansion of the state income tax base and an increase in state income tax revenue.
University of California-Los Angeles
University of Zurich
- H2 - Taxation, Subsidies, and Revenue
- O1 - Economic Development