Research
Papers
- A Tax based Model of Informality, MSc Economics Thesis September 2022
Abstract
In low and middle-income countries, the informal sector constitutes a significant portion of GDP and employment, posing challenges for taxation and social protection. Tax evasion tends to be a major driver of informality even in developed countries Pappadà & Rogoff (2023). This paper develops a theoretical model to understand how firms choose between formal and informal operations in the presence of imperfect enforcement. The model, inspired by Roy’s classic self-selection theory, examines the relationship between firm productivity and profit in the context of taxation. It suggests that firms with higher productivity are more likely to operate in the formal sector if there is a wider dispersion in productivity among formal firms. This dispersion is influenced by government policies, such as tax rates, evasion and compliance costs, as well as support for formal businesses and availability of educated labor. The paper lays the groundwork for an in-depth study of how tax policy affects informality.
Work In Progress
- Profit Shifting from the Global South: Role of Thin Capitalization Rules with Usama Jamal (Manchester), Kyle McNabb (ODI), and Mazhar Waseem (CEPR, IFS, Manchester)</i> October 2023
- Understanding Movements into and out of Informality: Theory and Evidence from Pakistan with Mazhar Waseem (CEPR, IFS, Manchester)
- A Tale of Two Thresholds: Dynamic Implications of Size-Based Tax Policies with Zehra Farooq (Tulane), Usama Jamal (Manchester) and Mazhar Waseem (CEPR, IFS, Manchester) October 2023 </li>
Abstract
Large multinational corporations pervasively exploit cross-country corporate tax rate differentials for profit shifting. One of the key channels that firms persistently use is to excessively lend themselves money from their foreign subsidiaries located in relatively low-tax countries. Since interest payment is tax-deductible against the profits a company makes, the host country is deprived of potential corporate tax revenues worth billions of dollars. In order to discourage this outflow of taxable profits, countries impose different anti-tax avoidance measures. In this research, we intend to study the effects of the imposition of two such reforms, namely Thin Capitalization Rule and Interest Deduction Limitation, on profit shifting by firms across the borders from Uganda. Using DiD and other quasi-experimental approaches, we intend to quantify the revenue and welfare losses caused by the profit shifting behavior of firms prior to the reforms by estimating the behavioral responses of MNCs along multiple margins including reported turnover, profits, assets, liabilities, and firm growth over time. Finally, we also intend to test whether the policy induced any anticipatory effects.