Henrik Kleven is a Lecturer in Economics at the London School of Economics and Political Science. He is a co-director of the Public Economics Programme (PEP) under STICERD at the LSE. He is also affiliated with the Institute for the Study of Labor (IZA), the Institute for Fiscal Studies (IFS), the Centre for Economic Policy Research (CEPR), and the Economic Policy Research Unit (EPRU). His research focuses on topics in public finance and labor economics. His work has appeared in peer-reviewed journals such as Econometrica, Economic Journal, and the Journal of Public Economics. He currently serves as an Associate Editor of the Journal of Public Economics.
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: 1. why can’t developing countries increase their fiscal capacity, and; 2. what makes advanced economies’ governments so successful in raising revenues?
The personal income tax system in Pakistan, based on discontinuities in average tax rates (notches) rather than marginal tax rates (kinks), may be inefficient, finds new IGC research by Henrik Kleven (LSE) and Mazhar Waseem (LSE). Using administrative data, the authors examine the responses of taxpayers to a complex and often confusing tax system, and find that taxpayers, in the neighbourhood of notches, reduce their reported earnings to lower their tax liability. They also find that taxpayers manipulate the composition of their reported income to categorise themselves as “wage earners”, which receives lighter taxation. This research has contributed to the recent decision by the Finance Ministry of Pakistan to replace the notch-based tax schedule with a kink-based one and to rationalise tax rates for wage-earners and self-employed individuals to reduce the disparity between the two.