Mazhar Waseem

How should governments tax mobile corporate income without distorting real capital allocation? We explore this question by evaluating the global shift from capital-based to earnings-based anti-avoidance rules, a cornerstone of international tax reform. Exploiting Uganda’s exogenous regime change, we show that while earnings-based caps reduce interest deductions, they fail to raise revenue and instead contract real activity. Welfare comparison shows such shifts replace a broad, low-distortion constraint with a narrow, high-distortion one, raising deadweight costs without a revenue dividend. Our findings challenge the consensus that earnings-based rules are uniformly superior, providing a general framework for designing anti-avoidance policy that balances avoidance and real objectives.

Using administrative tax records, two nationally-representative surveys, and a purpose-built survey from Pakistan, we estimate the long-run effects of Ramadan fasting. Maternal fasting reduces birth weight, educational attainment, and adult earnings. We document three novel findings. First, while fasting rates do not vary by socioeconomic status, the impacts concentrate among poorer households, implying a poverty penalty in consequences of early-life shocks. Second, exposure transmits intergenerationally through both maternal and paternal lines. Third, effects vary by trimester in patterns consistent with developmental biology. Back-of-the-envelope calculations suggest this single mechanism permanently lowers Pakistan’s steady-state GDP by 1.5% or by $5.6 billion annually.

Size-based regulations and taxation are ubiquitous. In this paper, we examine the impact of size-based taxation on firm growth by exploiting a large and permanent tax reform from Pakistan, where the VAT threshold was raised from PKR 5 million to PKR 10 million. Using a difference-in-differences framework and rich administrative data, we estimate the causal effects of this reform on firms whose growth was previously constrained by the size threshold. Our findings reveal substantial growth effects: treated firms saw their revenue increase by 32 log-points, costs by 19 log-points, and gross profits by 13 log-points. These effects are driven by real economic activity, as third-party reported outcomes, such as wages and imported inputs, also grew by similar margins. Treated firms paid higher taxes across various measures, highlighting their strong willingness to pay to get rid of the size-based taxation. The results emphasize the importance of carefully designing size-based policies, as they can lock firms into significantly slower growth trajectories.

We study theoretically and empirically how firm-to-firm sales relationships shape firm dynamics and productivity. We first present a parsimonious model of firm dynamics where dynamics arise from the arrival of new potential matches between firms, acting as supply shocks from the perspective of buyers, and as demand shocks from the perspective of suppliers. Buyers switch to new suppliers when it is optimal to do so. The model matches the empirical regularities on firm volatility and exit probabilities declining with size, endogenous fat tails in firm growth rates, and some firms with persistently (but not permanently) high growth rates (“gazelles”). We apply the model to a setting in which contracting frictions between firms give rise to long-term relationships. These arrangements improve incentives within the relationship, but firms switch to new suppliers less frequently. This reduces firm dynamism, in the sense that firm sales are less volatile, there is less mean reversion, exit rates are lower, and the right tail of the firm size distribution is thinner. We corroborate these predictions with production data on Indian manufacturing plants and transaction-level data from Pakistan, using variation across regions in court congestion as a proxy for weak formal enforcement and variation across industries in whether the output requires customization. Using a quantitative implementation of our model we show that the dynamic cost of long-term contracts is significant, with the increased court congestion between the state with the fastest courts and the state with the slowest courts reducing aggregate productivity by roughly 15%.

We exploit a program of randomized audits covering the entire population of VAT filers from Pakistan to study how much evasion audit detects and how much evasion it deters by changing behavior. We document substantial evasion at the baseline: almost one-third of firms engage in tax evasion, and conditional on some evasion, the average evasion rate exceeds 40 percent. We find remarkable heterogeneity in evasion by firm size with the evaded amount exceeding the reported liability in the bottom three quartiles but is merely 7 percent in the top. Despite detecting substantial liabilities, audit does not deter tax evasion. Examining more than ten outcomes, we detect no effect of audit on proximate or distant behavior. We offer an explanation of the detection-without-deterrence result and discuss its optimal policy implications.

This paper considers how far private adaptation may reduce future vulnerability to climate risks. Using data on monthly firm-to-firm transactions from Pakistan, we find that flood-affected firms are more likely to relocate to safer ground, and shift purchases towards suppliers in less flood-prone regions and reached via less flood-prone roads. The results indicate that firms are imperfectly informed about flood risk, and update their beliefs following floods. We quantify aggregate impacts using a spatial model of endogenous production network formation. The findings suggest that climate change impacts will be mediated as firms learn from the experience of increasingly frequent disasters.

The value-added tax (VAT) is a cornerstone of the modern tax system. It has many desirable properties in theory: it does not distort firms’ production decisions, it is difficult to evade, and it generates a substantial amount of revenue. Yet, in many countries there are discrepancies between the textbook model of the VAT and its practical implementation. Where the VAT implementation diverges from its textbook model, the tax may lose its desirable properties. We draw on firm-level administrative VAT records from 11 countries at different income levels to examine the functioning of real-world VAT systems. We document four stylized facts that capture departures from the textbook VAT model which are particularly pronounced in lower-income countries. We discuss the effects on VAT performance and simulate a counterfactual retail sales tax and a turnover tax. Despite its shortcomings, we conclude that the real-world VAT is superior to the alternatives.

Value-added tax has seen phenomenal expansion in recent decades. Its appeal in part lies in its robustness to tax evasion relative to other tax instruments. Exploiting a tax reform from Pakistan that cuts the tax rate on five major industries of the country substantially, I estimate the size and nature of VAT evasion in the treated industries, finding that it ranges from 31–46% of the potential revenue. One important channel through which the evasion occurs is the overclaim of refunds, which constitute 11–23% of the potential revenue. Roughly two-fifths of the overclaimed refund is based on spurious invoices issued by invoice mills. Qualitatively, noncompliance is stronger in the latter stages of the supply chain, but it runs deep inside the chain, suggesting that on their own the self-enforcement mechanisms built into a VAT do not deter tax evasion fully.

I leverage the staggered rollout of VAT in Pakistan to document the role of withholding mechanism in the self-enforcement of a VAT. Focusing on firms already in the tax net, I see how their outcomes respond when the tax is extended upward to intermediates used by them. I find that the upward extension of VAT, which triggers the withholding mechanism, causes an immediate and large (more than 40 log-points) surge in sales reported by firms. The evolution of bunching above the zero-liability point and of input costs reported by firms suggest that this large response is indeed driven by the withholding mechanism. I also explore the role of withholding in the extensive margin compliance choices of firms.

We examine two Pakistani programs to see if the public disclosure of tax information and social recognition of top taxpayers promote tax compliance. Pakistan began revealing income tax paid by every taxpayer in the country from 2012. Simultaneously, another program began recognizing and rewarding the top 100 tax paying corporations, partnerships, self-employed individuals, and wage-earners. We find that both programs induced strong compliance responses. The public disclosure caused on average a 9 log-points increase in the tax paid by individuals exposed to the program. The increase was even larger for the social recognition program, around 17 log-points. Our results suggest that such programs can be important policy levers to mobilize resources, especially in weak-enforcement-capacity economies.

Using a series of Pakistani tax reforms and administrative records, I document that taxable income responses induced by to-zero tax cuts are orders of magnitude larger than ones induced by similar-sized other cuts. This finding is remarkably robust to alternative specifications and holds for both the self-employed and wage earners. I explore salience, selective enforcement, and discontinuous evasion costs as explanations of the observed behavior. I find that the data favor the last explanation. The difference between the two sets of responses is primarily driven by a large, discrete tax evasion response, which is included in the former but not in the latter behavior. I estimate the difference as a lower bound on tax evasion, showing that at least 70% of the income of low- and middle-income self-employed and 1% of low-income wage earners goes unreported.

This paper examines firm behavior to taxation in a low enforcement and large informality setting. Using quasi-experimental variation created by a tax reform, which increased taxation of partnerships substantially relative to firms of other legal form, and the population of income tax returns filed in Pakistan in 2006–11, I document that treated firms report significantly lower earnings, migrate into informality, and switch business form in response to the increase in tax rate. The revenue loss caused by these behavioral responses is so large that by the third year after the reform the government was collecting less revenue than it would have without the tax increase. This implies that the new tax rate was on the wrong side of the Laffer curve and would not have been optimal under any social preferences. The richness of the data and tax variation permits me to decompose the observed responses into real and evasion margins and to identify fiscal externalities created by the reform on other tax bases. The welfare cost of the reform increases by around 40% once these externalities are taken into account.

To fight evasion, many developing countries resort to production inefficient tax policies. This includes minimum tax schemes whereby firms are taxed either on profits or on turnover, depending on which tax liability is larger. Such schemes create non-standard kink points, which allow for eliciting evasion responses to switches between profit and turnover taxes using a bunching approach. Using administrative tax records on corporations in Pakistan, we estimate that turnover taxes reduce evasion by up to 60–70% of corporate income. Incorporating this in a calibrated optimal tax model, we find that switching from profit to turnover taxation increases revenue by 75% without reducing aggregate profits, despite the production inefficiency that it introduces.

We develop a framework for nonparametrically identifying optimization frictions and structural elasticities using notches—discontinuities in the choice sets of agents—introduced by tax and transfer policies. Notches create excess bunching on the low-tax side and missing mass on the high-tax side of a cutoff, and they are often associated with a region of strictly dominated choice that would have zero mass in a frictionless world. By combining excess bunching (observed response attenuated by frictions) with missing mass in the dominated region (frictions), it is possible to uncover the structural elasticity that would govern behavior in the absence of frictions and arguably capture long-run behavior. We apply our framework to tax notches in Pakistan using rich administrative data. While observed bunching is large and sharp, optimization frictions are also very large as the majority of taxpayers in dominated ranges are unresponsive to tax incentives. The combination of large observed bunching and large frictions implies that the frictionless behavioral response to notches is extremely large, but the underlying structural elasticity driving this response is nevertheless modest. This highlights the inefficiency of notches: by creating extremely strong price distortions, they induce large behavioral responses even when structural elasticities are small.