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Session Overview
Session
L07: Taxation in Developing Countries
Time:
Friday, 20/Aug/2021:
2:15pm - 3:45pm


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Presentations
2:15pm - 2:37pm

Limited Tax Capacity and the Optimal Taxation of Firms

Marcelo Arbex1, Enlinson Mattos2, Rebeca Regatieri3

1University of Windsor; 2FGV Fundacao Getulio Vargas, Brazil; 3FGV Fundacao Getulio Vargas and Brazilian Treasury

Limited tax capacity creates evasion opportunities that weakens the production efficiency argument. Motivated by the SIMPLES tax reform in Brazil that led to heterogeneous responses on revenues and production costs of upstream versus downstream informal firms, we characterize the optimal taxation of firms in a limited tax capacity economy to compare with the optimal value-added and turnover taxes. We show that the elasticities of misreported sales and purchase gaps to policy instruments are behavioral statistics that complement the traditional Diamond and Mirrlees (1971)’s mechanical effect of taxation. Numerical results suggest turnover taxes can be welfare enhancing vis-`a-vis a value-added system.

Arbex-Limited Tax Capacity and the Optimal Taxation of Firms-252.pdf


2:37pm - 3:00pm

Tax Policy and Household Businesses in Vietnam

Anh Pham

George Mason University, United States of America

Small and informal businesses constitute a large fraction of developing economies. This paper examines how a large increase in tax rates affects household businesses in Vietnam, which are a type of small businesses. We use balanced panel data of household businesses and exploit a drastic change in the tax code in 2013-2014 that varied tax rates by industry and locality. Surprisingly, on average, we do not find any evidence for changes in business registration, employment, revenue, and tax payments as a result of the large tax change. Plausibly, many household businesses lacked general understanding of the tax law. Testing this theory, we find that more-educated business owners responded more to the tax change than less-educated business owners. Specifically, when tax rates increased, more-educated owners were less likely to register their

business and reduced employment more than less-educated owners.

Pham-Tax Policy and Household Businesses in Vietnam-287.pdf


3:00pm - 3:22pm

Using Computerized Information to Enforce VAT: Evidence from Pakistan

Jawad Ali Shah

University of Kentucky, United States of America

I exploit quasi-experimental variation created by a Pakistani reform which switched audit and recovery of domestic input tax credits from manual to an algorithm-based computerized system which utilizes information beyond the in-built VAT information trail. I use administrative tax data for the universe of VAT returns filed in Pakistan from tax year 2009 to 2016 to estimate the impact of this reform on non-exporting firms. Using exporters as a comparison group, I find that claims fell by 2.36 million PKR per treated firm aggregating to 86 billion PKR. Firm heterogeneity analysis by business activity and firm structure shows a decline ranging from 30% to 90%. Surprisingly, the claims of corporations and partnerships also fell by 50-70%. This shows that VAT may only yield revenue gains when tax administration develops sufficient capability to implement an algorithm-based tracking system which goes beyond simple cross-verificationof invoices.

Shah-Using Computerized Information to Enforce VAT-519.pdf


3:22pm - 3:45pm

Electronic Payments and Tax Capacity: Evidence from Uruguay's Financial Inclusion Reform

Anne Brockmeyer1,2,3, Magaly Saenz Somarriba3

1Institute for Fiscal Studies; 2University College London; 3World Bank

Can the digitization of transactions in an economy increase tax compliance? We study the effect of financial incentives on the adoption of electronic payment technology and on tax compliance by firms. Exploiting administrative data and policy variation from Uruguay, we show that i) consumer VAT rebates for debit card transactions trigger an immediate 50% increase in the number of card transactions, ii) firms' use of card machines increases only on the intensive margin, and iii) tax compliance is unaffected. Endogenous card machine adoption and a low share of card sales in total reported sales can rationalize the findings.

Brockmeyer-Electronic Payments and Tax Capacity-339.pdf


 
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