New in FIT: Sebastián Castillo Ramos

The most recurrent question I have heard during the last weeks is: Why did you decide to come to Finland? This question appears rational since I am a Chilean and used to live in Santiago, Chile’s capital, with Mediterranean weather (more or less, depending on climate change now) and a vibrant academic atmosphere. However, the reason is more straightforward than you can imagine. My interest lies in public economics, and a research position in this line would be perfect for me. Fortunately, I got a post-doctoral position at the University of Helsinki and FIT, a dream position given my interest and background. And, as a Finn told me in my first days, the relevant thing is not the weather, but the clothes you wear.

My name is Sebastián Castillo Ramos. In Chile we use two last names, one from our father family and another from our mother’s family. Obviously, the origin and order can change because of the different types of families, but there are always two. I studied all my degrees in Chile, first a bachelor and a master in economics at Alberto Hurtado University, and finally a PhD in economics at the Pontifical Catholic University of Chile. In my earliest day as an economic student, I devoted most of my time trying to understand how economic fluctuations affect the economy, particularly the more socio-economic vulnerable people, so I focused more on macroeconomics. However, as I took more field courses, my interest went to development questions. Besides this, education has constantly been a relevant subject in my life, first because my mother is a teacher and inspired me to become a professor, and secondly, I understand the field as one of the most important to develop a society and a country.

Public economics appeared in my life during my second PhD year. I was trying to understand a paper that obtains the optimal education provision and how to finance it when the field appeared. The first step was to understand the technique behind the model, and because of this, I went into the mechanism design field. At this point, one of my advisors (with wise expertise) recommends I study public economics because he felt that this subject fits better with my interest. This advice became the switching point because it allowed me to find the topic that suits better with my avid and recurrent questions about how the government can improve our societies.

I started to study public economics with this broad question in mind. Going in-depth into the optimal policies to solve developing countries’ issues has been the lighthouse guiding my research. As a first step, I have studied the evasion distortions in the labor market. This is interesting in a developing country where labor markets have several vulnerabilities, like high informality and lack of payroll tax compliance. Also, the taxpayer composition allows plenty of problems, like different motivations for evading depending on your income. Improving tax evasion, in this setting, is most likely a win-win strategy. Government can raise tax collection, allowing an expansion in its spending, and the labor market can improve as well, advancing towards better conditions and fewer distortions.

Currently, I am working on two papers. The first is joint work with Romina Safojan, where we try to understand and estimate the effect of evasion incentives on self-employment and measure its welfare implications. To do that, we estimate the evasion rate across the household distribution and Chile and use this measure to assess the effect of evasion on household heads’ self-employment decision. We use Chile because of three things: (i) the tax system levies under the same regime for self-employed and wage-earners, dropping out the effect of differential tax scheme in the occupational decision; (ii) a tax reform that changed the marginal rate for only part of the taxpayers gives us a quasi-experimental variation; and (iii) gives us the data that we need. My second paper inquires over the distortion in a tax administration policy because of having tax evasion and occupational decision at the same time. To study this, I incorporate both elements into a hierarchical tax administration model and obtain the optimal audit, marginal tax rate, budget for the IRS, and public goods provision.

Besides, other issues round in my mind, mostly connected to situations I saw in Chile and Latin America. Some are associated with the effect of education and capital formation, the interaction between taxes and education, and the way to regulate sin goods consumption, among others. I always try to focus on real problems and how to solve them, using the tools that economics gives us.

In summary, I am a Chilean economist researching the evasion’s distortion in the labor market who studied and lived in Chile since childhood. Besides that, I have a vivid motivation to learn, work, and understand better how the government can improve our societies through its many instruments. And also, I like (perhaps the most) football.

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