Working Paper: NBER ID: w30218
Authors: Samuel Kapon; Lucia Del Carpio; Sylvain Chassang
Abstract: Tax collection by capacity constrained governments may exhibit multiple equilibria: if delinquency is low, limited enforcement capacity is enough to discipline deviators; if delinquency is high, limited enforcement capacity is overstretched and no longer dissuasive. In principle, divide-and-conquer, a theoretically important but untested principle from mechanism design, can be used to unravel the undesirable high-delinquency equilibrium. We investigate the challenge of doing so in practice.\nOur preferred mechanism takes the form of Prioritized Iterative Enforcement (PIE). Tax-payers are assigned a rank trading-off expected collection and expected capacity use. Tax-payers are then iteratively threatened in small groups for which collection capacity is sufficient to induce compliance. After repayment occurs, unused collection capacity is released to issue the next round of threats.\nIn partnership with a district of Lima (Peru) we experimentally evaluate the impact of PIE on the collection of property taxes from 13432 tax-payers. Reduced-form evidence both validates and refines the theoretical benchmark. A structural model of tax-payer behavior suggests that, keeping the number of collection actions fixed, PIE would increase tax revenue by 11.3%.
Keywords: tax collection; mechanism design; divide-and-conquer; property taxes; experimental evaluation
JEL Codes: C72; D04; D82; H26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Low Delinquency (G33) | Effective Discipline of Taxpayers (H26) |
| High Delinquency (G33) | Overstretched Enforcement Capacity (H76) |
| Implementation of PIE (Y10) | Tax Revenue (H29) |
| PIE Treatment Group (C92) | Taxes Collected (H29) |
| PIE Treatment Effect (C21) | Tax Collection (H26) |