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

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

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.

Suggested Citation

  • Best, Michael Carlos & Brockmeyer, Anne & Kleven, Henrik Jacobsen & Spinnewijn, Johannes & Waseem, Mazhar, 2015. "Production versus revenue efficiency with limited tax capacity: theory and evidence from Pakistan," LSE Research Online Documents on Economics 64916, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:64916
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    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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