WORKING PAPERS
Size-Dependent Tax Enforcement and Compliance: Global Evidence
(with Pierre Bachas), Working Paper, January 2017
In this paper, we provide identified estimates of how firm size impacts tax enforcement and compliance, using data from 125,000 firms in 140 countries. The magnitude of these size-gradients determines the quantitative importance of size-dependent policies in resource misallocation. The identification strategy uses the relative ranking of industries’ average firm-size in the US as an instrument for the relative ranking of the same industries’ size in a developing country. The first stage coefficient is robustly estimated and constant over levels of development. We find large and positive effects of firm size on tax enforcement and tax compliance and a negative effect on informal payments (bribes). These relations are non-linear in the size distribution: tax enforcement and compliance are U-shaped, while formal tax payments appear to substitute informal payments as firms grow. Finally, the size gradient in enforcement is strongest at lower levels of development and zero in high income countries.
Employment Structure and the Rise of the Modern Tax System
[JM Paper], Working Paper, January 2016
This 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.
Norms, Enforcement and Tax Evasion
(with Tim Besley and Torsten Persson), Working Paper, November 2014, Press: VOX
This paper studies individual and social motives in tax evasion. We build a simple dynamic model that incorporates these motives and their interaction. The social motives underpin the role of norms and is the source of the dynamics that we study. Our empirical analysis exploits the adoption in 1990 of a poll tax to fund local government in the UK, which led to widespread evasion. We also exploit a series of natural experiments due to narrow election outcomes, which induce shifts into single-majority local governments and lead to more vigorous enforcement of local taxes. The econometric results are consistent with the model’s main predictions on the dynamics of evasion.
Bank Non-Secrecy: Taxation and Financial Service Use in Mexico
(with Pierre Bachas), slides only, October 2015
Bank secrecy laws remain strong in developing countries and tax administrations’ access to financial information limited. Financial information could be valuable for tax collection, by providing a channel to register taxpayers and observe economic transactions (Gordon and Li 2009). However, leveraging the financial information trail could generate behavioral responses and induce clients to limit bank interactions, an important concern for countries developing financial inclusion. To answer this question we study the impact of the "Impuesto a Los depositos en Efectivo" (IDE), a tax on monthly cash deposits in Mexico, on clients’ financial behavior. The tax was designed to collect information on bank transactions and to be neutral for formal businesses, since fully deductible against other tax liabilities. We use an administrative panel dataset of 300,000 clients, from a private Mexican bank, and combine bunching at the cash deposit threshold with an event study approach around the repeal of the tax. We find IDE induced a large drop in cash deposits for self-employed individuals and small businesses, however the response is due to substitution from cash towards other deposit technologies, while total deposits remain unchanged. This implies that IDE permitted the collection of financial information for tax enforcement, without generating banking dis-intermediation.
Size-Dependent Tax Enforcement and Compliance: Global Evidence
(with Pierre Bachas), Working Paper, January 2017
In this paper, we provide identified estimates of how firm size impacts tax enforcement and compliance, using data from 125,000 firms in 140 countries. The magnitude of these size-gradients determines the quantitative importance of size-dependent policies in resource misallocation. The identification strategy uses the relative ranking of industries’ average firm-size in the US as an instrument for the relative ranking of the same industries’ size in a developing country. The first stage coefficient is robustly estimated and constant over levels of development. We find large and positive effects of firm size on tax enforcement and tax compliance and a negative effect on informal payments (bribes). These relations are non-linear in the size distribution: tax enforcement and compliance are U-shaped, while formal tax payments appear to substitute informal payments as firms grow. Finally, the size gradient in enforcement is strongest at lower levels of development and zero in high income countries.
Employment Structure and the Rise of the Modern Tax System
[JM Paper], Working Paper, January 2016
This 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.
Norms, Enforcement and Tax Evasion
(with Tim Besley and Torsten Persson), Working Paper, November 2014, Press: VOX
This paper studies individual and social motives in tax evasion. We build a simple dynamic model that incorporates these motives and their interaction. The social motives underpin the role of norms and is the source of the dynamics that we study. Our empirical analysis exploits the adoption in 1990 of a poll tax to fund local government in the UK, which led to widespread evasion. We also exploit a series of natural experiments due to narrow election outcomes, which induce shifts into single-majority local governments and lead to more vigorous enforcement of local taxes. The econometric results are consistent with the model’s main predictions on the dynamics of evasion.
Bank Non-Secrecy: Taxation and Financial Service Use in Mexico
(with Pierre Bachas), slides only, October 2015
Bank secrecy laws remain strong in developing countries and tax administrations’ access to financial information limited. Financial information could be valuable for tax collection, by providing a channel to register taxpayers and observe economic transactions (Gordon and Li 2009). However, leveraging the financial information trail could generate behavioral responses and induce clients to limit bank interactions, an important concern for countries developing financial inclusion. To answer this question we study the impact of the "Impuesto a Los depositos en Efectivo" (IDE), a tax on monthly cash deposits in Mexico, on clients’ financial behavior. The tax was designed to collect information on bank transactions and to be neutral for formal businesses, since fully deductible against other tax liabilities. We use an administrative panel dataset of 300,000 clients, from a private Mexican bank, and combine bunching at the cash deposit threshold with an event study approach around the repeal of the tax. We find IDE induced a large drop in cash deposits for self-employed individuals and small businesses, however the response is due to substitution from cash towards other deposit technologies, while total deposits remain unchanged. This implies that IDE permitted the collection of financial information for tax enforcement, without generating banking dis-intermediation.
WORK IN PROGRESS
State Capacities and Natural Resources
(with Tim Besley and Torsten Persson)
Employment Choice and the Extensive Margin of Tax Compliance: Evidence from Chile
(with Claudio Agostini)
State Capacities and Natural Resources
(with Tim Besley and Torsten Persson)
Employment Choice and the Extensive Margin of Tax Compliance: Evidence from Chile
(with Claudio Agostini)
NON PEER-REVIEWED PUBLICATIONS
State-Building in Resource-Rich Economies
Atlantic Economic Journal, 2011 (Winner of Best Undergraduate Paper Award), 39 (2), pp.171-193
Using a panel of 30 hydrocarbon-rich countries , this paper studies the impact of budgetary natural resource reliance on the non-resource tax effort. Budgetary resource reliance is proxied for by instruments which interact world market gas and oil prices with pre-sample (fixed) country-levels of natural resource production. In a within-country year fixed effects specification, a 1% increase in the budgetary resource share is found to be associated with a 1.5% decrease in the non-resource tax effort.
Aid and Public Finance
(with Markus Gstoettner), Atlantic Economic Journal, 2010 (Winner of Best Undergraduate Paper Award), 38 (2), pp.217-235
We construct a new indicator to assess the quality of public finance, the Public Finance Institutions Quality (PFIQ) Index. For our panel of 86 countries, we find that multilateral aid flows have a negative impact on recipient country PFIQ score, whereas exogenous improvements in public finance seem to attract more aid. These results provide insight into the “black box” of governance: failure to turn aid receipts into desired results seems partly attributable to multilateral aid, in its present form, not being suited to improving a country’s public finance institutions. However, international donor organisations do seem to reward exogenous improvements in quality and reliability of public finance systems.
State-Building in Resource-Rich Economies
Atlantic Economic Journal, 2011 (Winner of Best Undergraduate Paper Award), 39 (2), pp.171-193
Using a panel of 30 hydrocarbon-rich countries , this paper studies the impact of budgetary natural resource reliance on the non-resource tax effort. Budgetary resource reliance is proxied for by instruments which interact world market gas and oil prices with pre-sample (fixed) country-levels of natural resource production. In a within-country year fixed effects specification, a 1% increase in the budgetary resource share is found to be associated with a 1.5% decrease in the non-resource tax effort.
Aid and Public Finance
(with Markus Gstoettner), Atlantic Economic Journal, 2010 (Winner of Best Undergraduate Paper Award), 38 (2), pp.217-235
We construct a new indicator to assess the quality of public finance, the Public Finance Institutions Quality (PFIQ) Index. For our panel of 86 countries, we find that multilateral aid flows have a negative impact on recipient country PFIQ score, whereas exogenous improvements in public finance seem to attract more aid. These results provide insight into the “black box” of governance: failure to turn aid receipts into desired results seems partly attributable to multilateral aid, in its present form, not being suited to improving a country’s public finance institutions. However, international donor organisations do seem to reward exogenous improvements in quality and reliability of public finance systems.
