More money for the state
Sep 2023
UZH Magazin
Governments need tax revenue to create wealth and prosperity for their countries, but in low-income countries, raising taxes often hits the poorest people the hardest. Economist Dina Pomeranz is searching for solutions in Tanzania and the Democratic Republic of the Congo to prevent that from happening.
This article by Andres Eberhard was originally published in German in UZH Magazin 3/23. Translated by Mark Rabinowitz. Edited for layout purposes by the UBS Center.
Dina Pomeranz digs a few scraps of paper out of the coin pocket of her wallet. They bear vocabulary words in Swahili that she is trying to memorize. The economist is learning the East African language for the sake of her new project, which will take her to a number of countries, including Tanzania. In collaboration with local authorities there, Pomeranz wants to examine ways in which low-income countries can raise more tax revenue. She will do the same in the Democratic Republic of the Congo (DRC), but she is already linguistically equipped for that mission; the 46-year-old is a fluent speaker of the DRC’s official language, French, which she studied in Geneva and elsewhere.
Taxes are the fundament of practically every state, Pomeranz says, explaining the background of the project, for which she received a CHF 1.74 million SNSF Consolidator Grant from the Swiss National Science Foundation in February. “Aside from a few oil-producing nations, there are no wealthy countries with low tax revenue.” High-income countries, on average, take in tax revenue equal to 31% of their gross domestic product, compared to just 12% for low-income countries. Developing countries consequently have to borrow money or depend on international aid to finance urgently needed public goods such as schools, roads, social insurance programs and healthcare systems.
In other words, to liberate themselves from poverty, poor countries need to raise more tax revenue. The problem, though, is if they do that, they run the risk of worsening poverty and hampering economic development and, by extension, impeding public well-being and prosperity. It’s a vicious circle that Pomeranz and her team want to break.
Governments need tax revenue to create wealth and prosperity for their countries, but in low-income countries, raising taxes often hits the poorest people the hardest. Economist Dina Pomeranz is searching for solutions in Tanzania and the Democratic Republic of the Congo to prevent that from happening.
This article by Andres Eberhard was originally published in German in UZH Magazin 3/23. Translated by Mark Rabinowitz. Edited for layout purposes by the UBS Center.
Dina Pomeranz digs a few scraps of paper out of the coin pocket of her wallet. They bear vocabulary words in Swahili that she is trying to memorize. The economist is learning the East African language for the sake of her new project, which will take her to a number of countries, including Tanzania. In collaboration with local authorities there, Pomeranz wants to examine ways in which low-income countries can raise more tax revenue. She will do the same in the Democratic Republic of the Congo (DRC), but she is already linguistically equipped for that mission; the 46-year-old is a fluent speaker of the DRC’s official language, French, which she studied in Geneva and elsewhere.
Dina Pomeranz is UBS Foundation Assistant Professor of Applied Economics at the UZH Department of Economics
Who has money, and how much?
The five-year research project that Pomeranz is conducting together with an international team of co-authors from the DRC, Norway, Tanzania, and the USA and with support from a team of researchers onsite commenced at the start of July. Working together with local researchers is important to her, she says. Just a day after the official kickoff of the project, Pomeranz was already seated in an airplane headed to Dar es Salaam. There, in Tanzania’s largest city, she spoke with tax officials, researchers, labor union officials and businesspeople.
Raising taxes without burdening the poorest – easy to accomplish with the aid of progressive tax rates, but easier said than done in low-income countries where economic activity is more often informal, the state has less access to information and tax authorities have scant resources. “Public authorities often have no idea about who has how much money,” Pomeranz says, putting the main problem in a nutshell. It’s a well-known phenomenon – in earlier times, even in Switzerland and other western European countries the state was incapable of distinguishing between the poor and the wealthy.
Pomeranz has been conducting research into how governments can equitably take in more tax revenue for years, always in collaboration with local public authorities. Her research work had previously taken her mainly to South America; she also speaks fluent Spanish ever since her yearlong sojourn in Costa Rica as a teenager. In Chile and Ecuador, a value-added tax proved to be a good way to combat tax evasion. “Businesses need receipts to be able to deduct their expenses from their taxes,” Pomeranz explains. This creates a trail of all sales transactions that tax authorities can track, making it harder for vendors to hide income from the taxman.
The five-year research project that Pomeranz is conducting together with an international team of co-authors from the DRC, Norway, Tanzania, and the USA and with support from a team of researchers onsite commenced at the start of July. Working together with local researchers is important to her, she says. Just a day after the official kickoff of the project, Pomeranz was already seated in an airplane headed to Dar es Salaam. There, in Tanzania’s largest city, she spoke with tax officials, researchers, labor union officials and businesspeople.
Raising taxes without burdening the poorest – easy to accomplish with the aid of progressive tax rates, but easier said than done in low-income countries where economic activity is more often informal, the state has less access to information and tax authorities have scant resources. “Public authorities often have no idea about who has how much money,” Pomeranz says, putting the main problem in a nutshell. It’s a well-known phenomenon – in earlier times, even in Switzerland and other western European countries the state was incapable of distinguishing between the poor and the wealthy.
Little research done in poor countries
However, Tanzania and the Democratic Republic of the Congo in particular are much poorer countries and thus are not directly comparable because their economies are organized much more informally, so they have fewer receipts and fewer employment contracts in writing. By conducting research in low-income countries, Pomeranz is entering territory heretofore neglected by economists – the UZH professor, in an ongoing study, has proven that the poorer the country, the less macroeconomic research work is done there on average. “This even though the potential impact is especially powerful in such countries,” she says. Research, in her opinion, shouldn’t be done solely for islands of wealth, but should better depict the world’s entire population. After all, she says, the majority of people around the world live in developing countries. “Rich countries are the exception.”
In the project sponsored by the Swiss National Science Foundation, Pomeranz and her team want to test two potential ways out of the fiscal vicious circle. She calls the first avenue “better targeting,” or in other words, finding out exactly who really is capable of paying and who isn’t in order to send more tax inspectors after deeper-pocketed taxpayers. The second path that the economist considers quite promising is improved timing in collecting taxes. In low-income countries, expenses and income often arise at irregular times. “For example, a better moment to demand payment of taxes is after rather than before harvest time,” she says. “The goal, therefore, is to forecast the ideal time to collect taxes so that effective tax revenue increases while the burden on the poorest decreases,” Pomeranz explains.
However, Tanzania and the Democratic Republic of the Congo in particular are much poorer countries and thus are not directly comparable because their economies are organized much more informally, so they have fewer receipts and fewer employment contracts in writing. By conducting research in low-income countries, Pomeranz is entering territory heretofore neglected by economists – the UZH professor, in an ongoing study, has proven that the poorer the country, the less macroeconomic research work is done there on average. “This even though the potential impact is especially powerful in such countries,” she says. Research, in her opinion, shouldn’t be done solely for islands of wealth, but should better depict the world’s entire population. After all, she says, the majority of people around the world live in developing countries. “Rich countries are the exception.”
In the project sponsored by the Swiss National Science Foundation, Pomeranz and her team want to test two potential ways out of the fiscal vicious circle. She calls the first avenue “better targeting,” or in other words, finding out exactly who really is capable of paying and who isn’t in order to send more tax inspectors after deeper-pocketed taxpayers. The second path that the economist considers quite promising is improved timing in collecting taxes. In low-income countries, expenses and income often arise at irregular times. “For example, a better moment to demand payment of taxes is after rather than before harvest time,” she says. “The goal, therefore, is to forecast the ideal time to collect taxes so that effective tax revenue increases while the burden on the poorest decreases,” Pomeranz explains.
Economic activity in countries like Tanzania or the DRC is often informal, and public authorities lack information on citizens income status. (Image: Dar es Salaam, Tanzania; © Nichika Yoshida via Unsplash)
Consulting city chiefs
The conditions in Tanzania and the DRC are very different, and accordingly so are the approaches being taken by the researchers. In the DRC, Pomeranz wants to amass as much information on potential taxpayers as possible (employing a big data strategy). Then, with the help of machine learning tools, the different data sources are to be combined to identify relatively wealthy homeowners and to forecast the ideal time to collect taxes with the aid of information on paydays, harvest times and school tuition due dates. Existing tax information will also get factored in – the DRC today already levies a tax on houses. Furthermore, city chiefs are to be consulted. City chiefs are mostly elders in charge of a street or a neighborhood who possess more information than the state on who is employed where, when remittances from abroad arrive, and who is currently in a precarious financial situation.
In Tanzania, on the other hand, there is another way to make the wealthy pay up. Many better-off families in the region employ informal domestic workers. By joining forces, public authorities and labor unions can get more workers registered and thus ensure that corresponding social insurance contributions get paid. “If that works, those employees then benefit directly via pension funds and healthcare insurance,” Pomeranz explains. In addition, the timing of tax collections is to be improved in Tanzania as well by allowing businesses to pay their taxes on a more flexible schedule.
The conditions in Tanzania and the DRC are very different, and accordingly so are the approaches being taken by the researchers. In the DRC, Pomeranz wants to amass as much information on potential taxpayers as possible (employing a big data strategy). Then, with the help of machine learning tools, the different data sources are to be combined to identify relatively wealthy homeowners and to forecast the ideal time to collect taxes with the aid of information on paydays, harvest times and school tuition due dates. Existing tax information will also get factored in – the DRC today already levies a tax on houses. Furthermore, city chiefs are to be consulted. City chiefs are mostly elders in charge of a street or a neighborhood who possess more information than the state on who is employed where, when remittances from abroad arrive, and who is currently in a precarious financial situation.
In Tanzania, on the other hand, there is another way to make the wealthy pay up. Many better-off families in the region employ informal domestic workers. By joining forces, public authorities and labor unions can get more workers registered and thus ensure that corresponding social insurance contributions get paid. “If that works, those employees then benefit directly via pension funds and healthcare insurance,” Pomeranz explains. In addition, the timing of tax collections is to be improved in Tanzania as well by allowing businesses to pay their taxes on a more flexible schedule.
Boosting tax compliance
Pomeranz spent two weeks in Tanzania at the outset of the project. That she starts out by learning the local language and traveling to talk with people onsite seems surprising at first. After all, Pomeranz, as a macroeconomist, conducts quantitative research, working with numbers most of the time. But, she explains, “it’s about finding the right questions to ask in the first place”. Conversing at least partly without the aid of a translator helps her to “really understand” her interlocutor, she adds. Besides, she simply enjoys engaging in discussions, it’s a hobby of hers, Pomeranz says with a laugh. The economist is also well-known as a skillful debater on Twitter.
Pomeranz describes with an example how her many conversations in Dar es Salaam aided the implementation of the research project: “It turned out that an online platform that businesses can use to do their taxes over the internet already existed.” A platform of that kind would be an ideal means of testing whether a more flexible scheduling of tax payments could boost tax compliance. However, the new tool doesn’t get used much, which is why the researchers weren’t aware of its existence. They now plan to conduct a telephone survey to find out why the platform hardly gets used. The results of the survey will greatly influence the next steps of the project.
Pomeranz spent two weeks in Tanzania at the outset of the project. That she starts out by learning the local language and traveling to talk with people onsite seems surprising at first. After all, Pomeranz, as a macroeconomist, conducts quantitative research, working with numbers most of the time. But, she explains, “it’s about finding the right questions to ask in the first place”. Conversing at least partly without the aid of a translator helps her to “really understand” her interlocutor, she adds. Besides, she simply enjoys engaging in discussions, it’s a hobby of hers, Pomeranz says with a laugh. The economist is also well-known as a skillful debater on Twitter.
Pomeranz describes with an example how her many conversations in Dar es Salaam aided the implementation of the research project: “It turned out that an online platform that businesses can use to do their taxes over the internet already existed.” A platform of that kind would be an ideal means of testing whether a more flexible scheduling of tax payments could boost tax compliance. However, the new tool doesn’t get used much, which is why the researchers weren’t aware of its existence. They now plan to conduct a telephone survey to find out why the platform hardly gets used. The results of the survey will greatly influence the next steps of the project.
Quotes
Aside from a few oil-producing nations, there are no wealthy countries with low tax revenue.
Dina Pomeranz on Google Scholarbrowse
Contact
UBS Foundation Assistant Professor of Applied Economics
Dina Pomeranz's research focuses on public policies in developing countries, in particular in the areas of taxation, public procurement, firm development and the environment. Prior to joining the University of Zurich, she was an assistant professor at Harvard Business School, where she taught entrepreneurship for MBA students, and a Post-Doctoral Fellow at MIT's Poverty Action Lab.
Her work has been published in academic journals including the American Economic Review, the Quarterly Journal of Economics, the American Economic Journal: Applied Economics, the Journal of Economic Development and the Journal of Human Resources. In 2017, she was awarded one of the prestigious grants from the European Research Council (ERC) for her research on tax evasion and the role of firm networks.
She is an affiliate professor at the Abdul Latif Jameel Poverty Action Lab (J-PAL), the Bureau for Research and Economic Analysis of Development (BREAD) and the Center for Economic Policy Research (CEPR) and a member of the International Growth Centre (IGC). In 2018, she was elected to the Council of the European Economic Association (EEA), and in 2020 to the Board of Management of the International Institute of Public Finance (IIPF). She is a co-founder of the Graduate Applications International Network (GAIN), which supports prospective students from Africa in applying for graduate school in economics and related fields.
Professor Pomeranz also aims to contribute to the movement towards more evidence-based policy making, both in developing and economically more developed countries. With this goal in mind, she serves on the board or advisory board of a number of social enterprise ventures committed to translating research into practice, including Helvetas, Evidence Action, Policy Analytics, TamTam-Together Against Malaria and IDinsight. She has served as an expert witness to the Swiss parliament and is a member of the Federal Advisory Committee on International Cooperation.
UBS Foundation Assistant Professor of Applied Economics
Dina Pomeranz's research focuses on public policies in developing countries, in particular in the areas of taxation, public procurement, firm development and the environment. Prior to joining the University of Zurich, she was an assistant professor at Harvard Business School, where she taught entrepreneurship for MBA students, and a Post-Doctoral Fellow at MIT's Poverty Action Lab.
Her work has been published in academic journals including the American Economic Review, the Quarterly Journal of Economics, the American Economic Journal: Applied Economics, the Journal of Economic Development and the Journal of Human Resources. In 2017, she was awarded one of the prestigious grants from the European Research Council (ERC) for her research on tax evasion and the role of firm networks.
She is an affiliate professor at the Abdul Latif Jameel Poverty Action Lab (J-PAL), the Bureau for Research and Economic Analysis of Development (BREAD) and the Center for Economic Policy Research (CEPR) and a member of the International Growth Centre (IGC). In 2018, she was elected to the Council of the European Economic Association (EEA), and in 2020 to the Board of Management of the International Institute of Public Finance (IIPF). She is a co-founder of the Graduate Applications International Network (GAIN), which supports prospective students from Africa in applying for graduate school in economics and related fields.
Professor Pomeranz also aims to contribute to the movement towards more evidence-based policy making, both in developing and economically more developed countries. With this goal in mind, she serves on the board or advisory board of a number of social enterprise ventures committed to translating research into practice, including Helvetas, Evidence Action, Policy Analytics, TamTam-Together Against Malaria and IDinsight. She has served as an expert witness to the Swiss parliament and is a member of the Federal Advisory Committee on International Cooperation.