Gabriel Tourek
Jul 1, 2022
Citations
0
Influential Citations
7
Citations
Journal
Journal of Development Economics
Abstract
The tax behavior of small firms in low income countries shapes government revenues and the welfare of poor entrepreneurs. This paper provides evidence that how these firms respond to tax instruments diverges from traditional models of compliance in ways that have unintended and regressive consequences. Using the universe of administrative filings in Rwanda, I document perverse responses to changes in liability: an income tax reform that standard models would predict should lead all taxpayers to pay lower taxes in fact caused firms to increase tax paid by 75%. To explain this behavior, I establish a new stylized fact: firms consistently target past liability when paying taxes, even when the structure of liability changes. Many firms bunch sharply on their previous amount of tax paid year after year and stick to this level despite changes in their tax rate. Others increase tax paid rather than deviating downward from past levels when changes to the tax schedule remove their ability to pay the same amount as before. Evidence from a survey of filers and a randomized information experiment imply that firms’ uncertainty about own earnings generates reliance on the heuristic of previous liability, while enforcement perceptions and peers influence how firms select target amounts. Ultimately, this behavior produces regressive outcomes: less educated and less profitable entrepreneurs are more likely to overpay relative to their true liability. ∗Harvard Kennedy School. Email: gabrieltourek@fas.harvard.edu. I am indebted to my advisors, Nathan Hendren, Anders Jensen, and Asim Khwaja, for their guidance and encouragement. I also thank Pierre Bachas, Jie Bai, Emily Breza, Anne Brockmeyer, Nilesh Fernando, Edward Glaeser, Jennifer Kao, Nathan Nunn, Oyebola Okunogbe, Dina Pomeranz, Matthew Rabin, Gautam Rao, Stefanie Stantcheva, and Jonathan Weigel for helpful comments. This paper also benefited from comments from seminars at Harvard, the National Tax Association Conference, and the Zurich Conference on Public Finance in Developing Countries. I acknowledge funding from the Harvard Lab for Economic Applications and Policy, the J-PAL Governance Initiative, and the Weiss Family Program Fund for Research in Developing Countries. This study uses data provided by the Rwanda Revenue Authority, and I am grateful to Richard Dada, Alasdair Mackintosh, Lucie Mutabazi, and Gaudence Uwimana for their support and collaboration. The views expressed in the paper do not necessarily reflect those of the Rwanda Revenue Authority. The experimental component was registered in the American Economic Association Registry for randomized control trials under trial number AEARCTR-0002701.