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Production versus revenue efficiency with limited tax capacity: theory and evidence from Pakistan

Michael Best, Anne Brockmeyer, Henrik Jacobsen Kleven, Johannes Spinnewijn and Mazhar Waseem

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: To fight evasion, many developing countries use 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 nonstandard kink points, which allow for eliciting evasion responses to switches between profit and turnover taxes using a bunching approach. Using administrative data on corporations in Pakistan, we estimate that turnover taxes reduce evasion by up to 60–70 percent of corporate income. Incorporating this in a calibrated optimal tax model, we find that switching from profit to turnover taxation increases revenue by 74 percent without reducing aggregate profits.

JEL-codes: E6 J1 M40 (search for similar items in EconPapers)
Date: 2015-12-01
New Economics Papers: this item is included in nep-acc and nep-iue
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (137)

Published in Journal of Political Economy, 1, December, 2015, 123(6), pp. 1311 - 1355. ISSN: 0022-3808

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