Working Paper: CEPR ID: DP16116
Authors: Augustin Bergeron; Gabriel Tourek; Jonathan Weigel
Abstract: How can developing countries increase the tax revenue they collect? In collaboration with the Provincial Government of Kasaï-Central, we study a policy experiment in the D.R. Congo that randomly assigned 38,028 property owners to different property tax liabilities. We find that status quo tax rates are above the revenue-maximizing tax rate (RMTR). Reducing the property tax rate by approximately 34% would maximize government revenue, by increasing tax compliance. We then investigate how responses to tax rates interact with enforcement. We exploit two sources of variation in enforcement — randomized enforcement letters and random assignment of tax collectors — and show that the RMTR increases with enforcement. Replacing tax collectors in the bottom quartile of enforcement capacity by average collectors would raise the RMTR by 42%. Tax rates and enforcement are thus complementary levers. While a naive government that sequentially implements the RMTR and increases enforcement would raise revenue by 61%, a sophisticated government that prospectively implements the post-enforcement RMTR would instead raise revenue by 77%. These findings provide experimental evidence that low government enforcement capacity sets a binding ceiling on the revenue-maximizing tax rate in some developing countries, and thereby demonstrates the value of increasing tax rates in tandem with tax enforcement to expand fiscal capacity.
Keywords: No keywords provided
JEL Codes: H20; P48; D73
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low government enforcement capacity (H11) | revenue-maximizing tax rate (RMTR) (H21) |
| tax rates (H29) | tax compliance (H26) |
| enforcement capacity (P14) | revenue-maximizing tax rate (RMTR) (H21) |
| naive government implementation of RMTR and increasing enforcement (R48) | revenue (H27) |
| sophisticated government implementation of RMTR post-enforcement (E61) | revenue (H27) |
| low government enforcement capacity (H11) | binding ceiling on RMTR (R48) |