Essays in Public Finance and Economic Development

Abstract

This dissertation addresses various topics in public finance that are particularly relevant for developing countries. These topics include consumption taxes, tax evasion, and rent-seeking by government officials. The first and third chapters focus on how formal and informal taxes affect production and firm behavior in developing countries, while the second focuses on household responses to a consumption tax in a developed country context.

Chapter 1 examines firms’ response to a size-based exemption threshold for a Value Added Tax (VAT) in India and shows how compliance costs affect production and strategic misreporting among manufacturing firms. Although the marginal tax rate on production and compliance costs change discontinuously at the exemption threshold, firms’ response can be almost fully attributed to compliance costs alone. Patterns of input use corresponding to the reported output of firms just below the exemption threshold suggest that they are producing less output than they would have in the absence of the tax and not simply underreporting their true output to appear small.

Chapter 2, joint with Yeliz Kacamak and Eleanor Wilking, studies how the tax elasticity of the consumption tax base is affected by changing sales tax remittance rules. We study empirically how an important development in U.S. sales tax policy – the requirement of online retailers to remit the sales tax instead of the consumer, as part of Voluntary Collection Agreements (VCAs) – impacts this elasticity. Our identification strategy exploits quasi-experimental variation from the staggered state-wise introduction of the VCAs. We find that consumers reduce their online expenditure after the introduction of VCAs, consistent with an increase in compliance with sales taxes on online sales and suggesting that consumers took note of the tax change. On average, we do not find evidence of an impact of the remittance rule change on the elasticity of the tax base with respect to the tax rate.

Chapter 3, joint with Traviss Cassidy, studies whether competition between local governments can reduce rent-seeking by local officials in the context of a major period of decentralization in Indonesia that increased the number of local governments by 50 percent within a decade. District governments, which are responsible for most local public goods expenditure and receive revenue from business licensing and fees, split into smaller districts, increasing the number of local governments within original district boundaries. We find that on average, there is a small increase in the probability of any bribe payments by firms and no change in the average size of payments. However, newly created establishments in districts that split are less likely to report bribe payments. We suggest that these results are consistent with a model of rent-maximizing bureaucrats in which bribe rates are constrained by mobility of firms.