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

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

Research output: Contribution to journalArticlepeer-review

89 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)1311-1355
Number of pages45
JournalJournal of Political Economy
Volume123
Issue number6
DOIs
StatePublished - Dec 2015
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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