PUBLIC FINANCE 2025-2026
SESSION 1: introduction 2
SESSION 2: Léo Czajka - taxation in lower income countries 3
PRESENTATION 1: inequality and taxation 14
PRESENTATION 2: labour responses to taxation 22
PRESENTATION 3: tax evasion, enforcement and administration 31
PRESENTATION 4: international tax competition and profit shifting 44
PRESENTATION 5: taxation and the environment 55
PRESENTATION 6: macroeconomic impact of tax reforms 69
PRESENTATION 7: pensions 79
PRESENTATION 8: civil servant, incentives and corruption 92
EXAM INFORMATION 108
1
,SESSION 1: introduction
The topic
Public finance consists of a micro-segment and a macro-segment.
● micro: taxation
● macro: National Bank, balance of payments, debt …
Key questions of this course
● Can tax help reduce inequality?
● How do individuals respond to taxation?
● How do companies respond to taxation?
● Is tax evasion important?
● Is profit shifting a problem?
● Is tax an efficient tool for the environment?
● Should we increase the retirement age?
● Should there be public spending?
The exam (60%)
Closed-book exam
● interpreting a new paper
● discussing a graph/figure from one of the papers that have been discussed
○ What kind of methodology could you employ? How do you interpret these results?
○ interpret graphs, regression tables … in a public finance context
2
,SESSION 2: Léo Czajka - taxation in lower income countries
Introduction
Tax revenue in low income countries, shown by total amount of taxes collected as a ratio of GDP, grouped by income level
● high-income countries collect > 20% of GDP which is twice as large compared to low-income countries
● if you would include social contributions, the difference would be even larger
Decomposition of government income in different countries
● non-tax revenues include capital income generated through ownership of natural resources or firms
(state-owned enterprises)
● for low-income countries, grants become more important and social contributions converge to zero
→ grants = money received from donors, US AID …
high-income countries upper-middle income countries
lower-middle income countries low-income countries
3
, Importance of grants for different countries
1. Low-income countries
More taxation is needed in low-income countries
● to fund public goods and services
○ eg. peace, regulated markets, large infrastructure and R&D, cooperation, education …
○ public goods are characterised by non-rivalry and non-exclusivity
→ the private sector doesn’t have the correct incentives to provide this
● to build social safety nets against sickness, unemployment aging …
● to not depend on foreign aid
○ being dependent introduces volatility, because it can be taken away
○ being dependent introduces constraints because it is foreign money
→ monetary aid is tied to specific projects but this may not solve problems you want to tackle
● to improve fairness
○ spare the poor and better target the richest
You want to increase taxation, but too much taxation can decrease welfare…
● tax discourages efforts thus lowers future income
→ takes incentives away for people to create a lot of value (working people)
● there are government failures as well
○ inefficiency: the more resources you have, the less efficient you will be
○ unaccountable
● taxation is political: what is fair for some may not be perceived as fair by others
How can low-income countries increase their tax revenue?
● increase current tax rates and add new taxes
● increase enforcement
1.1 Increasing tax revenue by changing the law
International cooperation has contributed to harmonizing legal frameworks.
① Tarrifs have been gradually reduced and replaced by Value Added Tax (VAT)
In theory, VAT is better because
● it does not distort production
● it is self-enforcing, because VAT paid and VAT collected offset each other
The effectively collected VAT is equal to the difference between the taxes paid on goods bought and taxes collected on
goods sold.
4
SESSION 1: introduction 2
SESSION 2: Léo Czajka - taxation in lower income countries 3
PRESENTATION 1: inequality and taxation 14
PRESENTATION 2: labour responses to taxation 22
PRESENTATION 3: tax evasion, enforcement and administration 31
PRESENTATION 4: international tax competition and profit shifting 44
PRESENTATION 5: taxation and the environment 55
PRESENTATION 6: macroeconomic impact of tax reforms 69
PRESENTATION 7: pensions 79
PRESENTATION 8: civil servant, incentives and corruption 92
EXAM INFORMATION 108
1
,SESSION 1: introduction
The topic
Public finance consists of a micro-segment and a macro-segment.
● micro: taxation
● macro: National Bank, balance of payments, debt …
Key questions of this course
● Can tax help reduce inequality?
● How do individuals respond to taxation?
● How do companies respond to taxation?
● Is tax evasion important?
● Is profit shifting a problem?
● Is tax an efficient tool for the environment?
● Should we increase the retirement age?
● Should there be public spending?
The exam (60%)
Closed-book exam
● interpreting a new paper
● discussing a graph/figure from one of the papers that have been discussed
○ What kind of methodology could you employ? How do you interpret these results?
○ interpret graphs, regression tables … in a public finance context
2
,SESSION 2: Léo Czajka - taxation in lower income countries
Introduction
Tax revenue in low income countries, shown by total amount of taxes collected as a ratio of GDP, grouped by income level
● high-income countries collect > 20% of GDP which is twice as large compared to low-income countries
● if you would include social contributions, the difference would be even larger
Decomposition of government income in different countries
● non-tax revenues include capital income generated through ownership of natural resources or firms
(state-owned enterprises)
● for low-income countries, grants become more important and social contributions converge to zero
→ grants = money received from donors, US AID …
high-income countries upper-middle income countries
lower-middle income countries low-income countries
3
, Importance of grants for different countries
1. Low-income countries
More taxation is needed in low-income countries
● to fund public goods and services
○ eg. peace, regulated markets, large infrastructure and R&D, cooperation, education …
○ public goods are characterised by non-rivalry and non-exclusivity
→ the private sector doesn’t have the correct incentives to provide this
● to build social safety nets against sickness, unemployment aging …
● to not depend on foreign aid
○ being dependent introduces volatility, because it can be taken away
○ being dependent introduces constraints because it is foreign money
→ monetary aid is tied to specific projects but this may not solve problems you want to tackle
● to improve fairness
○ spare the poor and better target the richest
You want to increase taxation, but too much taxation can decrease welfare…
● tax discourages efforts thus lowers future income
→ takes incentives away for people to create a lot of value (working people)
● there are government failures as well
○ inefficiency: the more resources you have, the less efficient you will be
○ unaccountable
● taxation is political: what is fair for some may not be perceived as fair by others
How can low-income countries increase their tax revenue?
● increase current tax rates and add new taxes
● increase enforcement
1.1 Increasing tax revenue by changing the law
International cooperation has contributed to harmonizing legal frameworks.
① Tarrifs have been gradually reduced and replaced by Value Added Tax (VAT)
In theory, VAT is better because
● it does not distort production
● it is self-enforcing, because VAT paid and VAT collected offset each other
The effectively collected VAT is equal to the difference between the taxes paid on goods bought and taxes collected on
goods sold.
4
