Taxation and Development

Transcription

1 Taxation and Development Henrik Kleven London School of Economics January / 51

2 What Separates PF-Devo From PF? PF-Devo is more than just studying taxation in developing countries Focus on tax enforcement and administration: Traditional PF assumes perfect enforcement and administration (zero evasion at zero administrative costs) In PF-Devo, enforcement/administration are central objects of interest Focus on the long-run of development: Tax system economic development Implicit notion that more tax revenue is a good thing 2 / 51

3 Tax Take vs GDP per Capita Total taxes / GDP OLS Coefficient: 5.72 (1.24) Log GDP per Capita in / 51

4 Theories of Government Growth 1. Demand for public goods has an income elasticity above one [Wagner s law] 2. Stagnating productivity in the public sector [Baumol s cost disease] 3. Ratchet effect theory whereby temporary shocks (e.g. wars) raise government expenditure, which do not fall back after the shock 4. Political economy aspects (e.g. democratization) 5. Tax enforcement improves with development 4 / 51

5 Two Approaches 1. Big-picture macro approach: what shapes tax capacity and tax policy in the long run? How does a government go from raising around 10% of GDP in taxes to raising 40-50%? Fiscal-Capacity-Investment View: Besley & Persson (2009, 2010, 2011, 2013, 2014) Byproduct-of-Development View: Kleven, Kreiner & Saez (2009, 2016), Kleven (2014), Jensen (2016) 2. Nitty-gritty micro approach: given weak tax capacity, what can governments do to incrementally improve Tax administration Tax enforcement Tax policy Tax morale 5 / 51

6 Two Approaches The big-picture macro approach is intellectually interesting, but unlikely to yield concrete and conclusive policy guidance So most recent work takes the nitty-gritty micro approach Analyzes specific contexts and problems, one at a time Frontier of micro approach: Data: administrative tax records Identification: RCTs or quasi-experiments Models: third-best models with imperfect compliance Policy: empirics and models inform the design of (incremental) policy innovations 6 / 51

7 Overview of Topics 1. Tax enforcement 2. Tax policy 3. Tax administration 4. Tax morale 7 / 51

8 Tax Enforcement 8 / 51

9 Tax Enforcement Models of deterrence and compliance: Allingham & Sandmo (1972): Self-reporting; audits and penalties AS-Model Kleven et al. (2009, 2011, 2016): Third-party reporting; information; firm size/complexity Enforcement instruments 1. Audits 2. Penalties 3. Third-party information reporting 4. Other verifiable information trails (credit cards, receipts, etc.) 5. Withholding Kleven et al. (2011, 2016): tax enforcement is fully successful iff verifiable third-party information (3-4) has wide coverage 9 / 51

10 Tax Evasion and Third-Party Information Kleven et al. (2011): Evidence From Danish Audit Experiment Figure 1: Evasion by Fraction of Income Self Reported Evasion rate Total evasion rate 45 line Third party evasion rate Fraction of income self-reported Notes: the source is Kleven et al. (2011). The figure displays estimates of the total evasion rate (fraction of total income undeclared) and the third party evasion rate (fraction of third party reported income undeclared), conditional on having positive evasion, by deciles of the fraction of income self reported. Further details can be found in the original source. 10 / 51

11 Tax Take and Third-Party Information Figure 2: Tax Take Kleven and (2014): Third Party Cross-Country Reporting Evidence across Countries Panel A: Tax Take vs Fraction Self Employed Tax / GDP ratio DENMARK SWEDEN NORWAY Italy Germany United Kingdom Brazil Japan United States Mexico Fraction self-employed Panel B: Tax Take vs Fraction of Self Employed and Employees in Evasive Jobs.5 11 / 51

12 Aggregate Employee Shares Across Countries Jensen (2016): Evidence From 90 Micro Surveys Employee share in total employment RWANDA INDIA CHINA INDONESIA MEXICO [Obs=90] Log real per capita income Country obs Local poly + 95% CI US Employee share in employment RWANDA 6 7 Log real pe Cross cty obs [n=67] 12 / 51

13 Distributional Employee Shares Within Countries Jensen (2016): Evidence From 90 Micro Surveys Descriptive evidence: new stylized facts India [$1034 pc] China [$1950 pc] Non Agr employment share Decile employment share Income Deciles Employee Mexico [$7834 pc] Self employed Income Deciles Employee US [ pc] Self employed Non Agr employment share Non Agr employment share Income Deciles Employee Self employed Income Deciles Employee Self employed 13 / 51

14 Distributional Employee Shares Within Countries and the Income Tax Exemption Threshold DescriptiveJensen evidence: (2016): newevidence stylized From facts 90 Micro Surveys India [$1034 pc] China [$1950 pc] Non Agr employment share Decile employment share Income Deciles Employee Mexico [$7834 pc] Self employed Income Deciles Employee US [ pc] Self employed Non Agr employment share Non Agr employment share Income Deciles Employee Self employed Income Deciles Employee Self employed 14 / 51

15 Income Tax Base Share Across Countries Jensen (2016): Evidence From 90 Micro Surveys PIT base share in total employment RWANDA INDIA CHINA INDONESIA MEXICO [Obs=90] Log real per capita income Country obs Local poly + 95% CI US PIT base share in total employment RWANDA 6 7 Log real pe Cross cty obs [n=67 15 / 51

16 Aggregate Employee Share in Income Tax Base Jensen (2016): Evidence From 90 Micro Surveys Employee share in PIT base RWANDA INDIA INDONESIA CHINA MEXICO [Obs=90] US Log real per capita income Country obs Local poly + 95% CI Employee share in PIT base RWANDA 6 7 Log real pe Cross cty obs [n=67] I 16 / 51

17 Tax Enforcement Studies in Developing Countries Pomeranz (2015) [VAT in Chile]: Randomized audit letter experiment Does the paper trail between trading firms in a VAT-chain deter evasion? No random variation in the paper trail, only in audit threats Two findings: 1. Transactions covered by a paper trail (firm-to-firm) respond less to audits than transactions not covered (firm-to-consumer) 2. Audit threats to non-compliant firms have positive spillovers upstream, but not downstream Consistent with a paper trail effect between business partners (and with third-party information effects in Kleven et al. 2011) 17 / 51

18 Tax Enforcement Studies in Developing Countries Kumler, Verhoogen, and Frias (2013) [Payroll Tax in Mexico]: Substantial underreporting of wages by firms, with evasion being declining in firm size Giving employees incentives to ensure accurate employer reports improve compliance Carillo, Pomeranz, and Singhal (2014) [CIT in Ecuador]: Third-party information is ineffective if taxpayers can make offsetting adjustments on less verifiable margins Evidence from rich countries (with high 3rd-party coverage) may not reveal marginal effect where coverage is very low Naritomi (2015) [VAT in Brazil]: Providing incentives for consumers to ask for VAT receipts and whistleblow non-compliant firms improves compliance 18 / 51

19 Tax Policy 19 / 51

20 Tax Policy: Traditional Analysis Traditional PF analysis builds on three classic contributions: 1. Diamond-Mirrlees (1971): commodity taxes, prod. efficiency 2. Mirrlees (1971): income taxes 3. Atkinson-Stiglitz (1976): income vs commodity taxes Policy recommendations coming out of this literature: 1. Use progressive income taxes 2. Use uniform VAT/sales tax 3. Do not use differentiated commodity taxes (except for externalities/internalities) 4. Do not use capital taxes (?) 5. Do not use taxes on turnover, trade, and intermediate inputs 20 / 51

21 Tax Policy: Theory vs Reality in Poor Countries Low-income countries tend to rely on the wrong tax policies (Gordon & Li 2009) Tax Structures Two responses: 1. Policies should be changed (Newbery & Stern 1987) 2. The models are wrong, not the policies Traditional models assume: Full set of tax instruments (except for taxes on innate ability) Perfect enforcement of these tax instruments Implications of informality or evasion for optimal tax policy: Informality (extensive margin): Emran & Stiglitz (2005); Keen (2006); Gordon & Li (2009) Evasion (intensive margin): Best, Brockmeyer, Kleven, Spinnewijn & Waseem (2015) 21 / 51

22 From Tax Rates to Tax Instruments Much academic work studies the pattern of optimal tax rates Taking the tax instrument as given (e.g., nonlinear income tax) Allowing for lots of flexibility in tax instruments This is second-order for developing economies Here the choice between tax instruments is key Which instruments represent the best trade-off between standard efficiency-equity concerns and compliance concerns? Taxonomy of Taxes: Modern: income taxes, social security taxes, VAT Traditional: property taxes, wealth transfer taxes, excises, tariffs, etc. 22 / 51

23 Tax Take Across Countries Total Taxes / GDP Total taxes / GDP OLS Coefficient: 5.72 (1.24) Log GDP per Capita in / 51

24 Tax Structure Across Countries Modern Taxes / GDP Traditional Taxes / GDP Modern taxes / GDP OLS Coefficient: 6.25 (1.13) Traditional taxes / GDP OLS Coefficient: 0.53 (0.47) Log GDP per Capita in Log GDP per Capita in / 51

25 Tax Take and Tax Structure Over Time 50 Tax/GDP (%) France 50 Tax/GDP (%) Sweden Modern Taxes 30 Modern Taxes Traditional Taxes 10 0 Traditional Taxes Tax/GDP (%) United Kingdom 50 Tax/GDP (%) United States Modern Taxes Modern Taxes 10 0 Traditional Taxes 10 0 Traditional taxes / 51

26 From Macro to Micro Best, Brockmeyer, Kleven, Spinnewijn & Waseem (2015) Production Efficiency Theorem: Any second-best optimal tax system maintains production efficiency Policy implication: Firms should be taxed on their profits, not on their turnover Ubiquitous production inefficient tax scheme: Minimum Tax Scheme (MTS) that taxes firms on either profits or turnover depending on which tax liability is larger Such schemes are motivated by the idea that turnover taxes are harder to evade than profits taxes Best et al. (2015) analyze the MTS on corporations in Pakistan 26 / 51

27 Empirical Methodology Using Minimum Tax Scheme Best, Brockmeyer, Kleven, Spinnewijn & Waseem (2015) MTS combines a profit tax with a turnover tax: T = max {τ π (y c) ; τ y y} and τ π > τ y where y = turnover, c = costs, and τ π, τ y are tax rates Firms switch between profit and turnover taxes when the reported profit rate π crosses a threshold: τ π (y c) = τ y y π y c y = τ y τ π Non-standard kink where both tax rate and tax base jump Kink changes real and evasion incentives differentially Develop method for eliciting (bounds on) evasion from bunching at the MTS kink 27 / 51

28 Bunching Theory Best, Brockmeyer, Kleven, Spinnewijn & Waseem (2015) Density c (y) = 1- y g (c-c) = 0 c (y) = 1 g (c-c) = bunching at minimum tax kink y, (c-c) y/ Profit Rate (y-c)/y 28 / 51

29 Variation in Minimum Tax Kink Best, Brockmeyer, Kleven, Spinnewijn & Waseem (2015) Variation in profit tax rate τ π across firms: High rate of 35%, low rate of 20% [depends on incorporation date, turnover, assets, #employees] Variation in turnover tax rate τ y over time: : tax rate of 0.5% 2008: turnover tax scheme withdrawn 2009: tax rate of 0.5% 2010: tax rate of 1% 29 / 51

30 Bunching Evidence: High-Rate Firms 2006/07/09 Best, Brockmeyer, Kleven, Spinnewijn & Waseem (2015) Density High rate Kink Reported Profit as Percentage of Turnover High rate Firms 30 / 51

31 Bunching Evidence: High-Rate vs Low-Rate Firms Best, Brockmeyer, Kleven, Spinnewijn & Waseem (2015) Density High rate Kink Low rate Kink Reported Profit as Percentage of Turnover High rate Firms Low rate Firms 31 / 51

32 Bunching Evidence: 2006/07/09 vs 2008 Best, Brockmeyer, Kleven, Spinnewijn & Waseem (2015) Density /07/09 Kink No Kink in Reported Profit as Percentage of Turnover 2006/07/ / 51

33 Bunching Evidence: 2006/07/09 vs 2010 Best, Brockmeyer, Kleven, Spinnewijn & Waseem (2015) Density /07/09 Kink 2010 Kink Reported Profit as Percentage of Turnover 2006/07/ / 51

34 Summary of Results Best, Brockmeyer, Kleven, Spinnewijn & Waseem (2015) Bunching at MTS kink + model evasion responses to switches between profit and turnover taxation Turnover taxes reduce evasion by up to 60-70% of corporate income Competing hypothesis: filing costs / lazy reporting Lazy Reporting Use empirical estimates and model to analyze the optimal choice of tax instrument Switch from pure profit tax to pure turnover tax can increase revenues by 74% without decreasing aggregate after-tax profits (i.e., a welfare gain) Does not include welfare cost from GE cascading So it may be worthwhile to deviate from production efficiency to improve compliance 34 / 51

35 Tax Administration 35 / 51

36 Tax Administration In developing countries, incentives for civil servants are poor: Pay is relatively low Pay is untied to performance Career advancement opportunities are limited/uncertain Non-pecuniary job benefits (e.g. social status or influence) and corruption can be substantial Research on public sector incentives in education and health Little research incentives and corruption in tax administration 36 / 51

37 Pakistan Performance Pay Project Khan, Khwaja & Olken (2016) RCT in collaboration with the Excise & Taxation Department in Punjab, Pakistan Focus on the local property tax in Punjab Implement performance pay for tax officials in order to: Raise tax revenue With minimum cost (wage outlays, taxpayer dissatisfaction) Randomly allocate tax officials to different incentive schemes: Revenue Revenue PLUS (adjusts for accuracy and taxpayer satisfaction) Flexible Bonus (wider set of criteria, subjective adjustments) 37 / 51

38 Treatment Effects on Total Tax Collected IGC Project: Pakistan Khan, Khwaja Performance & Olken (2016) Pay Project Source: Khan, Khwaja, Olken (2014) / 51

39 Corruption? Khan, Khwaja & Olken (2016) Revenue gains come from a small fraction of properties (3%) that become taxed at their true value In a survey, these taxpayers report not paying larger bribes The vast majority of properties in treated areas do not pay higher taxes, but instead report higher bribes This is roughly consistent with a collusion story: Performance pay increases tax collectors bargaining power over taxpayers, who either have to pay higher bribes to continue evading or pay substantially higher taxes if collusion breaks down 39 / 51

40 Tax Morale 40 / 51

41 Tax Morale Taxonomy of tax morale (Luttmer & Singhal 2014): Intrinsic motivation (innate preference) Social norms (depend on other individuals) Reciprocity (depends on the state) Culture (long-run societal effect) We know relatively little about such effects: What is the quantitative importance of tax morale mechanisms? Can policy makers affect tax morale through policy design? What we can say is that tax take and compliance are correlated with proxies for tax morale across countries 41 / 51

42 Tax Take vs Trust Figure 6 Kleven (2014) Tax Take versus Social and Cultural Indicators across Countries A: Tax Take versus Trust.5 DENMARK SWEDEN.4 Italy NORWAY Germany.3 Brazil United Kingdom Japan Tax / GDP ratio.2.1 Mexico United States China Most people can be trusted B: Tax Take versus Beliefs a.5 DENMARK SWEDEN.4 NORWAY Italy Germany.3 Brazil Un Tax / GDP ratio.2.1 Mexico 0.2. People in need b lack of w C: Tax Take versus Social Capital Index (Civic Participation, Voter Turnout, Crime).5 DENMARK NORWAY SWEDEN Italy o D: Tax Take versus Charitab.5 o 42 / 51 It

43 Mexico Tax Take vs Social Capital 0.2 Most people can be trusted People in need Kleven (2014): Index of Civic Participation, Voter Turnout, and Crime lack of w C: Tax Take versus Social Capital Index (Civic Participation, Voter Turnout, Crime).5 DENMARK NORWAY SWEDEN Italy.4 Germany United Kingdom.3 Japan Tax / GDP ratio.2 United States D: Tax Take versus Charita.5 Tax / GDP ratio I.4 German Brazil.3 Un.2 China Social capital index.1 Mexico Fraction of pe money Notes and Sources: The figure shows the country-level observations, latest ava with GDP per capita below $5,000 (in 2005 PPP terms) or natural resource ren above 20 percent are excluded from the sample. Tax/GDP ratio is the share of country s nominal GDP in 2012 (source: Index of Economic Freedom, Heritage weighted-average survey response to the question of whether most people 43 / 51can

44 Tax Take vs Beliefs About the Poor Kleven (2014) nd Cultural Indicators across Countries DENMARK SWEDEN NORWAY ingdom s a B: Tax Take versus Beliefs about the Poor.5 DENMARK SWEDEN.4 NORWAY Italy Germany.3.2 Brazil United Kingdom Japan United States.1 Mexico Tax / GDP ratio.6.8 be trusted ital Index rnout, Crime) DENMARK WAY SWEDEN Italy People in need because of laziness, lack of willpower D: Tax Take versus Charitable Donations.5 DENMARK SWEDEN.4 Italy NORWAY io 44 / 51

45 From Macro to Micro Studying Tax Morale Using Randomized Letter Treatments Del Carpio (2014) [Peru Property Tax]: Letters that provide information about compliance norms had a strong positive impact on compliance Hallsworth, List, Metcalfe, Vlaev (2014) [UK Income Tax]: Letters with norms and public goods messages improves the timely payment of taxes, conditional on declaration Dwenger, Kleven, Rasul, Rincke (2015) [German Church Tax]: In an unenforced tax system, they find that (i) intrinsically motivated compliance is substantial, (ii) that much of it may be driven by duty-to-comply, and (iii) there is no crowd-out between extrinsic and intrinsic motivations 45 / 51

46 Conclusion PF-Devo was under-researched for a long time, but is now quickly growing Recent work is fueled by the increasing availability of administrative data and a wealth of quasi-experimental variation Rather than relying on off-the-shelf developed country solutions, the literature takes a more nitty-gritty micro approach grounded in the specific context and constraints of developing countries There are still many unanswered questions, so hopefully we will see much more work on this in the future 46 / 51

47 Appendix Graphs 47 / 51

48 Allingham-Sandmo Model True income z, reported income z, evasion e = z z Tax rate τ, probability of audit p, penalty θ τ e Expected utility: E [u] = (1 p) u ( z (1 τ) + τ e)+p u ( z (1 τ) θ τ e) First-order condition: u (c A ) u (c N ) = 1 p p θ Back 48 / 51

49 Compliance Puzzle? A Taxpayer evades if de[u] de > 0 around e = 0, which implies p (1 + θ) < 1 In practice p (1 + θ) 0 AS-Model predicts that everybody evades at least some Is there a compliance puzzle? For developed countries: maybe For developing countries: no Back 49 / 51

50 Tax Structure in Poor vs Rich Countries Gordon and Li (2009) Revenue is lower Share of income tax is lower Shares of corporate income tax, consumption taxes, border taxes and seignorage are higher Informal economy is larger Back 50 / 51

51 Test for Lazy Reporting Fraction of Cost Categories Reported Turnover Tax Applies Kink DD = (0.0049) DD near = (0.0067) Profit Tax Applies Reported Profit as Percentage of Turnover 2006/7/9 (Kink) 2008 (No Kink) Back 51 / 51