TY - JOUR
T1 - Production vs Revenue Efficiency With Limited Tax Capacity: Theory and Evidence From Pakistan
AU - Best, Michael
AU - Brockmeyer, Anne
AU - Kleven, Henrik
AU - Spinnewijn, Johannes
AU - Waseem, Mazhar
PY - 2015/12
Y1 - 2015/12
N2 - To fight evasion, many developing countries resort to production-inefficient tax policies. This includes minimum tax schemes whereby firms are taxed on either profits or turnover, depending on which tax liability is larger. Such schemes create non-standard kink points, which allow for eliciting evasion responses to switches between profit and turnover taxes using a bunching approach. Using administrative tax records on corporations in Pakistan, we estimate that turnover taxes reduce evasion by up to 60-70% of corporate income. Incorporating this in a calibrated optimal tax model, we find that switching from profit to turnover taxation increases revenue by 74% without reducing aggregate profits, despite the production inefficiency that it introduces.
AB - To fight evasion, many developing countries resort to production-inefficient tax policies. This includes minimum tax schemes whereby firms are taxed on either profits or turnover, depending on which tax liability is larger. Such schemes create non-standard kink points, which allow for eliciting evasion responses to switches between profit and turnover taxes using a bunching approach. Using administrative tax records on corporations in Pakistan, we estimate that turnover taxes reduce evasion by up to 60-70% of corporate income. Incorporating this in a calibrated optimal tax model, we find that switching from profit to turnover taxation increases revenue by 74% without reducing aggregate profits, despite the production inefficiency that it introduces.
U2 - 10.1086/683849
DO - 10.1086/683849
M3 - Article
SN - 0022-3808
VL - 123
SP - 1311
EP - 1355
JO - Journal of Political Economy
JF - Journal of Political Economy
IS - 6
ER -