Macroeconomics

Understanding fiscal capacity in developing economies: Firms as third-party tax enforcers

  • Blog Post Date 01 March, 2012
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Henrik Kleven

London School of Economics and Political Science (LSE)

h.j.kleven@lse.ac.uk

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Claus Kreiner

University of Copenhagen

ctk@econ.ku.dk

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Emmanuel Saez

University of California, Berkeley

saez@econ.berkeley.edu

The difference in tax revenues (as a percentage of GDP) between developed and developing countries has always been consistently large. An IMF report estimates it to be 10-15 percentage points. The discrepancy poses two questions: Why can’t developing countries increase their fiscal capacity, and; What makes advanced economies’ governments so successful in raising revenues? The second question is the main focus of this project. It presents a simple model to explain why third-party income reporting by employers dramatically improves income tax enforcement and helps advanced countries in raising revenues.

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