WORKING PAPERS
[REVISED] Employment Structure and the Rise of the Modern Tax System
NBER Working Paper No. 25502, October 2019
This paper shows how the increase in information trails through the long-run transition from self-employment to employee-employment explains the rise of the modern income tax system. I construct a new database which covers 100 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 four 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 tax exemption threshold is maximized and remains constantly high; 4) decreases in the exemption threshold are strongly associated with increases in tax collection. These findings are consistent with a model where a high employee-share is a necessary condition for effective 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.
Informality, Consumption Taxes and Redistribution: Theory and Cross-Country Evidence from Expenditure Diaries
(with Pierre Bachas and Lucie Gadenne), Working Paper, October 2019
Can consumption taxes be progressive? In this paper, we construct a new dataset of household expenditure using representative micro-data from 30 countries at different levels of economic development to study the redistributive properties of consumption taxes. Using reported place of purchase to proxy for consumption in the informal sector, we find a large and negative relationship between informal consumption and household income. This implies that consumption taxes are de-facto redistributive: we find that households in the top decile pay on average more than twice as much taxes, as a share of expenditure, than households in the bottom decile. We then construct a model of optimal commodity taxation in the presence of an informal sector to study optimal tax policy over the course of economic development, and calibrate the model to our data. Optimal uniform rates are decreasing with economic development, but optimal rate differentiation is higher in richer countries. In particular, optimal subsidies on food are substantially lower in developing countries once the informal sector is taken into account.
Norms, Enforcement and Tax Evasion
(with Tim Besley and Torsten Persson), NBER Working Paper No.25575, February 2019, 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. The evidence is 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 and Sean Higgins), slides only, October 2015
Economies are increasingly becoming cashless. Since cash is an anonymous transaction technology, this trend presents an opportunity to reduce informal sector activities and increase tax compliance. Whether governments should encourage the transition towards cashless technologies depends on the elasticity of firms' behavior with respect to the price of cash. We combine panel data on over 300,000 bank clients with a natural experiment in Mexico which repealed a tax of 3% on cash deposits. We show that entrepreneurs and small firms increase cash usage by over 20% following the repeal of the tax. The effect stems primarily from substitution away from modern deposit methods (e.g., electronic and online deposits), with limited evidence of a small increase in total deposits. While the mix of cash versus modern deposit technologies is very elastic to relative prices, total deposits appear inelastic, suggesting limited tensions between governments' tax compliance objectives and financial inclusion.
PUBLISHED PAPERS
Size-Dependent Tax Enforcement and Compliance: Global Evidence and Aggregate Implications
(with Pierre Bachas and Roberto Fattal Jaef), Journal of Development Economics, 140, 2019
This paper studies how tax enforcement and tax compliance varies with firm size and investigates its macroeconomic consequences. The identification strategy uses the ranking of industries' average firm size in the United States as an instrument for the size ranking of the same industries in developing countries. Data on 125,000 firms in 140 countries shows that tax enforcement and compliance increase with firm size. When quantified in a general equilibrium model, removing size dependent taxation leads to gains in total factor productivity of 1 to 2%.
[REVISED] Employment Structure and the Rise of the Modern Tax System
NBER Working Paper No. 25502, October 2019
This paper shows how the increase in information trails through the long-run transition from self-employment to employee-employment explains the rise of the modern income tax system. I construct a new database which covers 100 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 four 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 tax exemption threshold is maximized and remains constantly high; 4) decreases in the exemption threshold are strongly associated with increases in tax collection. These findings are consistent with a model where a high employee-share is a necessary condition for effective 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.
Informality, Consumption Taxes and Redistribution: Theory and Cross-Country Evidence from Expenditure Diaries
(with Pierre Bachas and Lucie Gadenne), Working Paper, October 2019
Can consumption taxes be progressive? In this paper, we construct a new dataset of household expenditure using representative micro-data from 30 countries at different levels of economic development to study the redistributive properties of consumption taxes. Using reported place of purchase to proxy for consumption in the informal sector, we find a large and negative relationship between informal consumption and household income. This implies that consumption taxes are de-facto redistributive: we find that households in the top decile pay on average more than twice as much taxes, as a share of expenditure, than households in the bottom decile. We then construct a model of optimal commodity taxation in the presence of an informal sector to study optimal tax policy over the course of economic development, and calibrate the model to our data. Optimal uniform rates are decreasing with economic development, but optimal rate differentiation is higher in richer countries. In particular, optimal subsidies on food are substantially lower in developing countries once the informal sector is taken into account.
Norms, Enforcement and Tax Evasion
(with Tim Besley and Torsten Persson), NBER Working Paper No.25575, February 2019, 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. The evidence is 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 and Sean Higgins), slides only, October 2015
Economies are increasingly becoming cashless. Since cash is an anonymous transaction technology, this trend presents an opportunity to reduce informal sector activities and increase tax compliance. Whether governments should encourage the transition towards cashless technologies depends on the elasticity of firms' behavior with respect to the price of cash. We combine panel data on over 300,000 bank clients with a natural experiment in Mexico which repealed a tax of 3% on cash deposits. We show that entrepreneurs and small firms increase cash usage by over 20% following the repeal of the tax. The effect stems primarily from substitution away from modern deposit methods (e.g., electronic and online deposits), with limited evidence of a small increase in total deposits. While the mix of cash versus modern deposit technologies is very elastic to relative prices, total deposits appear inelastic, suggesting limited tensions between governments' tax compliance objectives and financial inclusion.
PUBLISHED PAPERS
Size-Dependent Tax Enforcement and Compliance: Global Evidence and Aggregate Implications
(with Pierre Bachas and Roberto Fattal Jaef), Journal of Development Economics, 140, 2019
This paper studies how tax enforcement and tax compliance varies with firm size and investigates its macroeconomic consequences. The identification strategy uses the ranking of industries' average firm size in the United States as an instrument for the size ranking of the same industries in developing countries. Data on 125,000 firms in 140 countries shows that tax enforcement and compliance increase with firm size. When quantified in a general equilibrium model, removing size dependent taxation leads to gains in total factor productivity of 1 to 2%.
SELECTED WORK IN PROGRESS
Progressivity and Development
(with Pierre Bachas and Gabriel Zucman)
Building Tax Capacity at Scale: Evidence from Technology Investments in Ghana
(with James Dzansi, David Lagakos, and Henry Telli)
Progressivity and Development
(with Pierre Bachas and Gabriel Zucman)
Building Tax Capacity at Scale: Evidence from Technology Investments in Ghana
(with James Dzansi, David Lagakos, and Henry Telli)
NON PEER-REVIEWED PUBLICATIONS
State-Building in Resource-Rich Economies
Atlantic Economic Journal, 2011, 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, 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, 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, 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.