Working Paper: NBER ID: w15221
Authors: Benjamin A. Olken; Monica Singhal
Abstract: Informal payments are a frequently overlooked source of local public finance in developing countries. We use microdata from ten countries to establish stylized facts on the magnitude, form, and distributional implications of this "informal taxation." Informal taxation is widespread, particularly in rural areas, with substantial in-kind labor payments. The wealthy pay more, but pay less in percentage terms, and informal taxes are more regressive than formal taxes. Failing to include informal taxation underestimates household tax burdens and revenue decentralization in developing countries. We propose a simple model of information and enforcement constraints that parsimoniously explains the patterns in the data.
Keywords: informal taxation; local public finance; developing countries
JEL Codes: H27; H41; O17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| informal taxation (J46) | household income levels (D19) |
| informal taxation (J46) | local public goods financing (H49) |
| informal taxation (J46) | local revenue estimates (H71) |
| household expenditure (D12) | informal tax rate (J46) |