Dr Lucie Gadenne on how taxes work in developing countries and why she decided to become an economistTuesday 2 Jul 2019
What research projects are you currently involved with?
In general I work on public policy in developing countries, particularly public finance – taxation – in the developing world.
My research aims to improve our understanding of how taxes work in developing countries - how they affect firms and consumer behaviours; to understand what’s the most efficient way to tax – taxing in a way that raises revenues but doesn’t harm growth; and to understand who ends up paying taxes in developing countries.
To do this research I work closely with government officials and with politicians – for access to their data, and also for a good understanding of institutional knowledge. It’s not enough to read up on the internet or read tax laws - you need to talk to people in government offices, to the civil servants and the bureaucrats, asking - exactly what does this mean? What can a firm do to pay their taxes correctly? Or to evade their taxes? What do you think they are doing? I travel a lot to maintain the relationship. It can’t be done by email, you have to show up.
There’s a general academic aim, which is that we want to understand things better. And for me there is also a strong aim in trying to make sure we always have a link to policy. So we try to answer the question with as much data as possible, and then we ask what does that actually mean for tax policy.
What difference will this work make for society?
So for example, I’m working with the IFS think-tank on value-added taxes in India. We’re basically trying to understand whether value-added taxes affect a firm’s decisions to trade with other firms, under a tax system which gives you an incentive to only trade with firms that have the same tax status as you. It’s interesting because it lets us see how firms actually react to tax incentives - do we see that when taxes change they trade more or less than other firms?
Another strand of my research is trying to understand who actually pays taxes in developing countries, particularly consumption taxes – that’s value-added taxes, any kind of tax paid by firms on their sales. In rich countries we’ve tended to find that these taxes are regressive, that is, the poor pay more in taxes as a share of their income than the rich. But this might not be true in developing countries, because in these countries there are large informal sectors, shops and businesses which don’t pay taxes.
We’ve got data on 20 countries and we’re hoping to get to 30, but it’s clear in all the countries we’ve studied – in Latin America, sub-Saharan Africa, and a little bit in Asia – it’s always the case that the rich spend more in the formal sector. So with a flat tax on all consumption – say, 10 per cent on all consumption and all sales – you are actually going to get a very progressive tax system.
Through this research we’re building an optimal tax policy model based on equity considerations and efficiency. These models do already exist but so far they haven’t taken into account the informal sector. Once you introduce an informal sector it’s less optimal to have very different tax rates on different types of products. For example, if you set a lower tax rate on food, all you’re going to do is tax rich people’s consumption of food less. And that’s an important result because countries everywhere tend to set lower tax rates on food and policy advice to developing countries quite often recommends zero-rating food. Which reduces revenues. And we’re able to say that this is losing revenues to the government, the trade-off doesn’t look that great because you’re not getting redistribution from zero-rating food.
Why did you decide to become an economist?
Economics helps to make sense of the world. You hear about things like unemployment and inflation on the news every day and economics tells you why this matters, or why they may not matter. Economics is also how you understand political arguments – and I don’t think you can make an informed choice between political parties unless you know the basics of economics.
What interested you about this area of research?
I became interested in economics because of the policy aspects, particularly taxes because they are at the heart of what makes a government. You can’t have any kind of collective action if you don’t have any revenues to fund it. So taxes come before anything else, really.
I decided to focus on developing countries because there is a lot of work still to be done. There is a lot of work already on tax policy in rich countries – there has been a bias in terms of publishing and writing about the US and the UK, but now the profession is changing and there’s less focus on these countries.
Even so until recently there was hardly anything on developing countries. The work that was done was applying the models and the things we know about rich countries straight to, say, India, without really thinking about the fact that the context is different.
Why did you join the Economics Department at Warwick?
The quality of the department was a big factor. Economics at Warwick is very strong in applied microeconomics, public policy analysis in general, and working with data to establish causality. And I am at the intersection of public economics, development economics and I’m starting to work on trade economics so I needed a group that was good in all of these things, and Warwick is.
The interaction with think tanks was also a big draw. Warwick is in favour of me building strong relationships with relevant policy bodies including the IFS.
What has been your most memorable experience during your time in the department?
We organise a lot of seminars and workshops – arguably we do too much, but the stuff I have been involved in has been great.
Last year we organised an applied micro workshop in Venice, which attracted some really brilliant people – I had only really just started in the profession and there I was presenting my work in front of super-famous senior scholars at this workshop, because they wanted to come to Venice, and everyone is there in the same room – that was pretty cool.
- Lucie Gadenne and Julia Cage, Tax Revenues and the Fiscal Cost of Trade Liberalization, 1792-2006.
- Lucie Gadenne, Tax Me, But Spend Wisely? Sources of Public Finance and Government Accountability. American Economic Journal: Applied Economics, 2017, Vol 9 (1).