WORKING PAPERS
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Not(ch) Your Average Tax System: Corporate Taxation Under Weak Enforcement
(With Mauricio Soto) The corporate income tax typically allows all production costs to be deducted; thus when evasion opportunities exist, firms facing higher tax rates could reduce their tax base by both deflating revenue and inflating costs. Therefore, while the elasticity of profit is a sufficient statistic for the range of optimal tax rates given a tax base, separating the profit response into a revenue and a cost elasticity is needed to determine the optimal tax base. We take advantage of Costa Rica’s corporate tax design, where firms with marginally higher revenue face discontinuously higher average tax rates. We develop a novel method, which combines a bunching and a discontinuity design, to estimate the elasticity of profit and separate it into a revenue and a cost elasticity. Using administrative tax returns, we find that firms facing a higher tax rate slightly decrease revenue, and considerably increase costs, generating a large profit elasticity. With additional data, we show that firms’ responses appear to occur through tax evasion with no evidence of production responses. This implies that Costa Rican firms evade taxes on 70% of their profits when faced with a 30% tax rate. In this context, the revenue maximizing rate is below 25%, and alternative tax bases which limit cost deductibility could be optimal, since they reduce evasion opportunities on this crucial margin. |
Banking on Trust: How Debit Cards Enable the Poor to Save More
(With Paul Gertler, Sean Higgins & Enrique Seira)
Trust is an essential element of economic transactions, but trust in financial institutions is low, especially among the poor. Debit cards provide not only easier access to savings, but also a mechanism to monitor bank account balances and thereby build trust in a financial institution. We study a natural experiment in which debit cards are rolled out to beneficiaries of a Mexican conditional cash transfer program whose benefits are already directly deposited into a savings account. Using administrative data on over 340,000 bank accounts over four years, we find that prior to receiving a debit card, beneficiaries do not save in these accounts. Beneficiaries then begin to increase their savings after 9-12 months with the card. During this initial stagnant period, they use the card to check their balances frequently, and the number of checks decreases over time as their reported trust in the bank increases. After 1 -2 years, the debit card causes the savings rate to increase by 3-5 percent of income. Using household survey panel data, we find that this effect represents an increase in overall savings.
(With Paul Gertler, Sean Higgins & Enrique Seira)
Trust is an essential element of economic transactions, but trust in financial institutions is low, especially among the poor. Debit cards provide not only easier access to savings, but also a mechanism to monitor bank account balances and thereby build trust in a financial institution. We study a natural experiment in which debit cards are rolled out to beneficiaries of a Mexican conditional cash transfer program whose benefits are already directly deposited into a savings account. Using administrative data on over 340,000 bank accounts over four years, we find that prior to receiving a debit card, beneficiaries do not save in these accounts. Beneficiaries then begin to increase their savings after 9-12 months with the card. During this initial stagnant period, they use the card to check their balances frequently, and the number of checks decreases over time as their reported trust in the bank increases. After 1 -2 years, the debit card causes the savings rate to increase by 3-5 percent of income. Using household survey panel data, we find that this effect represents an increase in overall savings.
Size-Dependent Tax Enforcement and Compliance: Global Evidence
(With Anders Jensen)
We estimate the impact of firm size on tax enforcement and tax compliance using data from 125,000 firms in 140 countries. 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 a large and positive effects of firm size on tax enforcement and tax compliance and a negative effect on informal payments (bribes). The relation is non-linear in the size- distribution: enforcement and compliance is concentrated at the top and flat among small and middle-sized firms. Finally, the slope of enforcement with size is strongest at lower levels of development and zero in high income countries.
(With Anders Jensen)
We estimate the impact of firm size on tax enforcement and tax compliance using data from 125,000 firms in 140 countries. 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 a large and positive effects of firm size on tax enforcement and tax compliance and a negative effect on informal payments (bribes). The relation is non-linear in the size- distribution: enforcement and compliance is concentrated at the top and flat among small and middle-sized firms. Finally, the slope of enforcement with size is strongest at lower levels of development and zero in high income countries.
Bank Non-Secrecy: Taxation and Financial Service Use in Mexico (Slides Only)
(With Anders Jensen)
Bank information could be valuable for tax collection by providing a channel to register taxpayers and observe economic transactions (Gordon and Li 2009). However, private agents’ could respond by limiting financial activity, an important concern for countries developing financial inclusion. We use account level panel data on 300,000 bank clients to study clients’ financial behavior with respect to the cash deposit tax (IDE) in Mexico. The tax was designed to collect information on cash transactions while remaining fully neutral for formal taxpayers, since it could be deduced against any other tax liability. We find evidence that it induced a large drop in cash deposits for self-employed individuals and small businesses. These responses are fully explained by substitution from cash towards other deposit technologies (point of sales, online, checks), leaving total deposits unchanged. We find that these modern deposit technologies were abandoned and firms reverted to cash deposits once the tax was removed.
(With Anders Jensen)
Bank information could be valuable for tax collection by providing a channel to register taxpayers and observe economic transactions (Gordon and Li 2009). However, private agents’ could respond by limiting financial activity, an important concern for countries developing financial inclusion. We use account level panel data on 300,000 bank clients to study clients’ financial behavior with respect to the cash deposit tax (IDE) in Mexico. The tax was designed to collect information on cash transactions while remaining fully neutral for formal taxpayers, since it could be deduced against any other tax liability. We find evidence that it induced a large drop in cash deposits for self-employed individuals and small businesses. These responses are fully explained by substitution from cash towards other deposit technologies (point of sales, online, checks), leaving total deposits unchanged. We find that these modern deposit technologies were abandoned and firms reverted to cash deposits once the tax was removed.
