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Imperfect Enforcement of a Tax Threshold: The Consequences on Efficiency

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  • Jonathan Goyette

Abstract

In this paper, I build a model of firms’ growth with heterogeneous entrepreneurs where audits for taxes are conditioned either on sales or employees and where entrepreneurs negotiate a bribe in exchange of a tax rebate when audited by tax inspectors. I show that the impact differential between the two auditing strategies depends on the regulation environment of a country. The model is calibrated and validated using firm-level data from Uganda. The model replicates well the Ugandan size distribution of firms as well as other key statistics relevant for the counterfactual experiments. Simulations show that, in a situation where Uganda could fully eradicate tax evasion and used the recouped taxes to subsidise production, productivity per worker could increase by as much as 45%. I also show that there could be a 16% annual gain in productivity per worker solely by conditioning audits on sales rather than on employees in Uganda.

Suggested Citation

  • Jonathan Goyette, 2019. "Imperfect Enforcement of a Tax Threshold: The Consequences on Efficiency," Journal of African Economies, Centre for the Study of African Economies, vol. 28(2), pages 119-146.
    • Handle: RePEc:oup:jafrec:v:28:y:2019:i:2:p:119-146.
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    File URL: http://hdl.handle.net/10.1093/jae/ejy018
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    Cited by:

    1. Zallé, Oumarou, 2022. "Natural Resource Dependence, Corruption, and Tax Revenue Mobilization," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 37(2), pages 316-336.

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