An International Tax Data Laboratory (ITD-Lab) For Studying Taxes, Firms and Development

Governments' ability to raise tax revenue is fundamental for economic development, financing investment in education, health, infrastructure and poverty alleviation. The growth of formal businesses aids revenue-raising and is key to improvements in productivity and living standards. Our research will use administrative tax data (ATD) to understand the interactions between taxation and business growth, with the aim of improving policy.

We seek to combine three types of analyses: We will study how individual taxpayers - mostly firms - are affected by the tax system and how they react to it. We will then aggregate these facts at the country level - the level at which policy is designed - to understand the implications of individual firms' behaviours for aggregate tax revenues, growth and production. Finally, we seek to study how these features of tax systems and firm behaviour change as countries develop with time, and how they vary across countries at different stages of development.

Progress on these questions has previously been hampered by the limited availability of firm panel data in lower-income countries. To break new ground, we will build an International Tax Data Lab (ITD-Lab) that brings together firm-level tax declarations covering multiple years (often over a decade) from 15-20 countries at different income levels. This is based on a unique partnership between the Institute for Fiscal Studies - the applicant's host institution which conducts research with firm tax data in the UK, Africa and Asia - and the World Bank - the applicant's previous employer which opened her access to data from Latin America, Francophone Africa and the Balkans.

Tax declarations are a rich resource, covering all formal firms in a country, and providing detailed information on firms' characteristics and behaviour. Yet, the structure of the data depends partly on the structure of the tax system, so that information from tax declarations is not immediately comparable across countries. ITD-Lab will make an important methodological effort to harmonise the data across countries, identifying concepts which are common across different tax systems (e.g. firm sales, profits and taxes paid) and matching them to the relevant variables in the data.

We will then use the data to study vital questions on tax and development. First, we will examine how the tax burden is distributed across firms of different sizes and quantify the impact of tax differences on an economy's total production. Indeed, if some firms are taxed more heavily than others, this puts them at a disadvantage and can lower total production. Second, we will examine firm growth dynamics, tracking how a firms' profits evolve from company registration to peak production (or to closure). We will study how the growth patterns change across countries at different levels of economic development and with different tax systems. Finally, we will study the value-added tax. We will examine how the implementation of this tax diverges from the textbook model and whether the implementation grows closer to the textbook model as countries develop. Our findings will inform the design of tax policies and private sector support programs in developing countries, as discussed below.

To build a network promoting the use of administrative tax data in research, we will hold a monthly seminar series and an annual flagship conference bringing together academics and policymakers. In addition, we will facilitate the replication and extension of our research through training sessions and the publication of codes and semi-aggregate statistics (e.g. effective tax rates across firms of different size groups in all countries). ITD-Lab will strive to instil a culture of using administrative tax data for policy design in institutions worldwide.