Public Finance in Developing Countries:
Inaugural Conference of the Zurich Center for Economic Development
Conference
University of Zurich, December 12 – 13, 2016
Agenda: Monday, December 12, 2016
10.30 - 11.00
Registration / Coffee (SCR)
All talks take place in the ECON Seminar Room (ESR)
11.00 - 13.00
First Session: Taxing economic activity in developing countries
Anders Jensen, Jonas Hjort
Anders Jensen: Employment Structure and the Rise of the Modern Tax System
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.
SCR = Senior Common Room, Second Floor, Schönberggasse 1, 8001 Zurich
ESR = ECON Seminar Room, Second Floor SOF-G-21, Schönberggasse 1, 8001 Zurich
MBU = Main Building University of Zurich
Jonas Hjort: A Different Animal: The Value Added of Value Added Taxes in Low-Income Countries?
Value-added tax (VAT) systems have been implemented in many low-income countries (LICs) over the last
decades. Their use has been recommended by economists because VATs are predicted (i) not to distort
production, (ii) create paper trails, and (iii) generate ``offsetting’’ reporting incentives for transacting pairs
of firms. These latter two enforcement-friendly properties are often seen as particularly relevant for LICs,
where tax compliance is low. They themselves, however, rely on the Revenue Authority (RA) having sufficient
capacity, and firms believing the RA to have sufficient capacity. We evaluate the actual performance of a VAT
in a LIC context. To do so we use three years of comprehensive tax declaration level data from the Uganda
Revenue Authority (URA). We show that the distribution of reported value added is suspiciously low, with
dramatic consequences for taxes due. Importantly, this is despite the fact that the RA has direct access to
detailed paper trails: as in a growing number of LICs, firms are required to submit monthly reports on the
amount bought from/sold to any transaction partner declared under the VAT. We then compare the amount
reported by pairs of firms and find widespread misreporting, indicating that taxpayers do not believe the RA
to have capacity to enforce accurate reporting. This contrasts with results from middle- and high-income
countries where economic activities subject to paper trails tend to be reported accurately. We also investigate
potential drivers of misreporting, and what types of firms misreport. In ongoing work, we are computing the
extent of misreporting at customs in order to compare Uganda’s enforcement capacity – and firms’ beliefs
about its capacity – for the VAT to that for a theoretically more distortionary import tax. Our results illustrate
the importance of taking fiscal capacity seriously when designing tax systems for LICs.
13.00 - 14.30
Lunch (SCR)
14.30 - 15.30
"Egg-timer" session
Joana Naritomi, Guillermo Cruces, Bassirou Sarr, Thomas Rasmusen Tørsløv,
Zareh Asatryan
15.30 - 15.45
Coffee Break (SCR)
15.45 - 17.45
Second Session: Tax evasion and the design of tax rules
Anne Brockmeyer, Andreas Peichl
Anne Brockmeyer: Taxation, Information and Withholding: Evidence from Costa Rica
This paper studies tax enforcement in a low compliance context, focusing on two closely linked compliance
mechanisms: third-party reporting, and tax withholding by the third party. While standard theory predicts
that third-party reporting enhances compliance, withholding has generally been considered irrelevant.
However, withholding 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.
SCR = Senior Common Room, Second Floor, Schönberggasse 1, 8001 Zurich
ESR = ECON Seminar Room, Second Floor SOF-G-21, Schönberggasse 1, 8001 Zurich
MBU = Main Building University of Zurich
Andreas Peichl: Responses of Firms to Tax, Administrative and Accounting Rules: Evidence from
Armenia
Using panel data on the full population of corporate tax returns of Armenian firms, we study the behavioral
response of firms to three size-dependent regulations. We find: i) a strong response to an accounting notch
where International Financial Reporting Standards become mandatory; ii) a moderate response to an
administrative notch below which the frequency of filing and paying taxes declines from monthly to quarterly;
and iii) no response to a tax notch created by the registration threshold of the value added tax. Exploiting tax
audits, we provide evidence suggesting that income under-reporting drives the bunching response of firms by
between 60 and 100 percent. Additional evidence suggests that firms respond to tax audits by compensating
every additional dollar of audit driven increase in reported income by a 0.7-0.8 dollar increase in reported
deductions.
17.45 - 18.30
Break, snack, and transfer to location of Keynote address (SCR)
18.30
Keynote address: Joel Slemrod
20:00
Dinner (MBU)
SCR = Senior Common Room, Second Floor, Schönberggasse 1, 8001 Zurich
ESR = ECON Seminar Room, Second Floor SOF-G-21, Schönberggasse 1, 8001 Zurich
MBU = Main Building University of Zurich
Agenda: Tuesday, December 13, 2016
8.30 - 9.00
Arrival / Coffee (SCR)
All talks take place in the ECON Seminar Room (ESR)
8.30 - 10.30
Third session: Redistribution and commodity taxation
Lucie Gadenne, David Phillips
Lucie Gadenne: The Economics of Ration Shop Systems
Many developing countries simultaneously tax commodities and subsidize them up to a quota level through
ration shops. This particular combination of taxes and subsidies plays an important role in the public budgets
of developing countries; 11% of the world’s population uses India’s ration shop system. This paper first studies
under what conditions a ration shop system (piece-wise linear commodity taxes) is welfare improving
compared to standard linear taxes once we take into account the relevant characteristics of developing
countries. These are i) limited government capacity to observe household incomes and ii) market
fragmentation. I find that an inequality-averse government would set convex taxes on a wide range of goods
to redistribute and to partially insure households against price risk. Welfare gains to introducing convex taxes
are highest for necessities: normal goods that most poor households consume. I then take the model to Indian
data and find that combining ration shops and commodity taxes is welfare improving for three out of the four
goods that are currently in India’s ration shop system.
David Phillips: Commodity taxation and the case for uniformity: Empirical evidence from Mexico
Commodity taxes are an important source of revenue in developed and developing countries, and there is an
intense academic and policy debate about the appropriate rate structure of such taxes. In this paper we
examine Value Added Tax (VAT) rate structure in a setting where the prevalence of informal transactions
varies across commodities, from both an equity and efficiency perspective.
We use data and recent reforms to the VAT rate structure in Mexico to shed light on this. There are broad VAT
exemptions, zero-rating of food and other commodities, as well as significant evasion and informality, the rate
of which varies significantly across commodities. To examine the equity implications of VAT structure we
compare the introduction of a 2% uniform expenditure tax, proposed in 2009, with an increase in the standard
rate of VAT from 15% to 16%, which was actually implemented. The initial proposals were amended in an
effort to increase the progressivity of the reform. However, we find that the amendment was poorly targeted
at poorer households: using the revenue from the 2% uniform tax to compensate households with simpler
universal cash transfers or expanding existing social protection instruments would have been a much more
progressive policy. This shows the distributional case for zero rates of VAT on goods like food is weak –
especially given the growing sophistication of cash transfer programs in middle income countries.
We then examine the efficiency implications of Mexico’s VAT rate structure using a standard QUAIDS model
of consumer demand. We estimate that deviations from uniformity have a notable effect on spending patterns,
SCR = Senior Common Room, Second Floor, Schönberggasse 1, 8001 Zurich
ESR = ECON Seminar Room, Second Floor SOF-G-21, Schönberggasse 1, 8001 Zurich
MBU = Main Building University of Zurich
but very little effect on aggregate welfare and economic efficiency. We then argue that economic informality
may actually provide an efficiency reason for lower rates of tax on goods like food for which informal
production and transactions seem to be much more prevalent. This may turn the typical arguments about
differential VAT rates on their head. Rather than being justifiable on distributional grounds, but entailing an
efficiency cost, the reverse may actually be true in settings such as Mexico.
10.30 - 10.45
Coffee break (SCR)
10.45 - 11.45
Fourth session: Responses to corporate income taxes
Pierre Bachas, Jukka Pirttilä
Pierre Bachas: Not(ch) Your Average Tax System: Corporate Taxation Under Weak Enforcement
We ask whether developing countries, with limited tax capacity, can use the corporate income tax to raise
additional revenue, and design it optimally, given these constraints. To explore this question, we use the unique
design of the corporate income tax in Costa Rica, where firms with marginally different revenue face
discontinuously higher average tax rates. This notch feature allows us to estimate the elasticity of profits with
respect to the tax rate, and to separate it into its components, namely the revenue and cost elasticities. We
find that firms facing a higher tax rate slightly decrease reported revenue, but considerably increase reported
costs, leading to a large drop in reported profits. Using additional data sources, firms’ behavioral responses
appear to occur through tax evasion, with no evidence of production responses. Taken together, this implies
that Costa Rican firms evade taxes on 70% of their profits when faced with a 30% tax rate. In this context,
lowering corporate tax rates could increase tax revenue, since we estimate the revenue-maximizing rate to be
below 25%. Alternative tax rules that limit the deductibility of costs could be preferable since they reduce
evasion opportunities on this crucial margin.
Jukka Pirttilä: How do small firms respond to tax schedule discontinuities? Evidence from South
African tax registers
This paper studies the responsiveness of small and medium sized firms to various tax schedule discontinuities
using high-quality and population-wide administrative data from South Africa. We find sizable bunching of
firms at the thresholds where the corporate tax rate increases. The elasticity estimates for these corporate tax
kink points are large, ranging from 0.17 to 0.7. Bunching is very sharp and reacts immediately to changes in
the location of the kink points. These observations point to the direction that a sizable part of the response is
driven by reporting behaviour rather than changes in real activities.
12.45 - 13.45
Lunch (SCR)
SCR = Senior Common Room, Second Floor, Schönberggasse 1, 8001 Zurich
ESR = ECON Seminar Room, Second Floor SOF-G-21, Schönberggasse 1, 8001 Zurich
MBU = Main Building University of Zurich
13.45 - 16.00
Fifth Session: Procurement
Claudio Ferraz, Dina Pomeranz
Claudio Ferraz: Procuring Firm Growth: The Effects of Government Purchases on Firm Dynamics
Firms in the developing world exhibit much flatter life-cycle dynamics compared to firms in developed
countries. This paper examines the role of demand constraints in limiting the growth of small and medium
firms in Brazil. We test whether firms that win government procurement contracts grow more compared to
firms that compete for these contracts but do not win. We assemble a comprehensive data set combining
matched employer-employee data for the universe of formal firms in Brazil with the universe of federal
government procurement contracts. Exploiting a quasi-experimental design, we find that winning at least one
contract in a given quarter increases firm growth by 2.2 percentage points over that quarter, with 93% of the
new hires coming from either unemployment or the informal sector. These effects also persist well beyond the
length of the contracts. Part of this persistence comes from firms participating and wining more future
auctions, as well as penetrating other markets.
Dina Pomeranz: Can Audits Back fire? Evidence from Public Procurement in Chile
Auditing processes are intended to simply monitor compliance with existing rules. However, they may by
themselves sometimes create unintended impacts and incentives through the specific protocol by which audits
are executed. This paper investigates the effects of 2011 and 2012 audits in Chile on public entities' subsequent
public procurement practices. While the national procurement legislation tries to promote the use of more
transparent and competitive auctions rather than the more discretionary direct negotiations for selection of
public procurement suppliers, the auditing process of the national comptroller agency actually leads to more
scrutiny and a higher probability of being found guilty of an infraction in the procurement process for auctions
than for direct negotiations. This can create a disincentive for the use of auctions. Using a regression
discontinuity design based on a scoring rule of the national auditing agency, we find that indeed being audited
leads public entities to decrease their use of auctions by about 35 to 55 percentage points and increase the
use of direct contracts correspondingly. In order to further test the underlying mechanism, we develop a new
econometric approach to conduct subgroup analysis in regression discontinuity designs while holding other
observables constant.
16.00 - 16.15
Coffee break (SCR)
SCR = Senior Common Room, Second Floor, Schönberggasse 1, 8001 Zurich
ESR = ECON Seminar Room, Second Floor SOF-G-21, Schönberggasse 1, 8001 Zurich
MBU = Main Building University of Zurich
16.15 - 18.15
Sixth Session: Tax evasion interventions
Monica Singhal, Giacomo De Giorgi
Monica Singhal: Social Incentives and Firm Tax Compliance: Evidence from a Field Experiment in
Bangladesh
Standard mechanisms of tax enforcement in low capacity environments are often limited by informational
and resource constraints as well as corruption. We examine the effects of social incentives on firm behavior in
a randomized evaluation conducted with over 20,000 firms in Bangladesh. We present novel evidence on
patterns of firm formalization and compliance using matched census and administrative data. Our
experimental results indicate that firms do respond to social incentives and that the effectiveness of such
interventions depends on the degree of peer compliance.
Giacomo De Giorgi: Incentives to Business Tax Inspectors: an RCT in the Kyrgiz Republic
Regulatory transparency is key in improving state capacity and foster economic development. In the case of
tax collection activities, the lack of regulatory transparency negatively affects tax revenue mobilization efforts
of governments (Besley and Persson 2014). It also dampens private sector development, as it increases the
costs for private businesses of complying with tax legislation and dealing with the tax authority. Bribes may
raise the marginal tax rate of firms, with a distortionary negative impact on investment, productivity and
growth of MSEs (Olken and Pande 2012). This projects aims to improve the regulatory transparency of tax
collection in the Kyrgyz Republic (KR) where the issues outlined above appear particularly salient. We
conceptualize bribes as the equilibrium outcome of an asymmetric information environment where the
action of tax inspectors is unobserved to their principal. Tax inspectors exert effort to extort bribes from MSEs.
If tax inspectors are paid a fixed wage, the equilibrium level of effort and bribes will be higher than the efficient
one. Monetary incentives can decrease the willingness of tax inspectors to engage in bribing activities and
align the incentives of business tax inspectors with the ones of tax service headquarters. As a result, the
equilibrium amount of effort and bribes decreases. However, those effects will depend on the willingness of
MSEs to pay the bribe and avoid the cost of formal taxes. This is shaped by the degree of monopoly power by
the firm and of the pass-through parameter into consumer prices. In collaboration with the World Bank and
the State Tax Service (STS) of the KR, we designed a monetary incentive scheme, which pays a bonus to tax
inspectors whose size depends on the reported level of satisfaction of MSEs in their relationship with tax
officials. The form and size of monetary incentives which implements the first-best level of effort of tax
inspectors is unknown ex ante, as it crucially depends on the unobserved parameters of our conceptual
framework. We therefore designed two rounds of different incentives schemes. In two of them, local tax offices
compete among themselves to win a single prize. The size of the final prize varies across the two groups, thus
varying the power of incentives. We label these first two schemes as High Tournament (HT) and Low
Tournament (LT), with the prize being higher for the HT scheme. In the other two cases, local offices do not
compete among themselves. The bonus is calculated as a piece-rate, which rewards them proportionally based
on the office percentage improvement in MSE (customer) satisfaction. As before, we make the size of the piecerate parameter different across the two schemes, thus having a High Piece-rate (HP) and Low Piece-rate (LP)
scheme. In the second round of the intervention, and in line with our theoretical framework, we tackle the
issue of firm heterogeneity explicitly. We focus only on piece-rate schemes, and in one arm we tilt the scheme
so that the scoring rule disproportionately rewards the scoring of "smaller" firms.
SCR = Senior Common Room, Second Floor, Schönberggasse 1, 8001 Zurich
ESR = ECON Seminar Room, Second Floor SOF-G-21, Schönberggasse 1, 8001 Zurich
MBU = Main Building University of Zurich
18.15
Final note of the organizers
Directions and Location of Conference
Location
Directions from the main station to the conference venue
1.
2.
3.
4.
Take the tram number 10 from the tram stop Zürich Bahnhofplatz/HB.
Get out at the tram stop ETH/Universitätsspital.
Walk down the road until you reach the conference venue (approx. 5 - 10 minutes).
The Senior Common Room and the ECON Seminar Room are located on the second floor
of the building.
5. The restaurant uniTurm is located at the main building of the University of Zurich.
SCR = Senior Common Room, Second Floor, Schönberggasse 1, 8001 Zurich
ESR = ECON Seminar Room, Second Floor SOF-G-21, Schönberggasse 1, 8001 Zurich
MBU = Main Building University of Zurich