This project is a pilot for a full randomised control trial research project on understanding factors that affect tax compliance.
In many developing countries with weak state capacity, the first order question in tax compliance is the extensive margin as a large proportion of taxable individuals and firms remain outside the tax base; however, the tax compliance literature has mostly focused on the intensive margin of compliance (how much tax is paid). This project will shed light on how these individuals outside the tax base can be brought in. In addition, this study will explore the extent to which legal enforcement as well as alternative approaches may succeed in increasing compliance in a context like Liberia where there are political constraints in enforcing the tax law.
Increasing tax revenues is important for the provision of public goods needed for productive activities and economic growth. This project will provide direct evidence on the effect of different approaches to increasing revenue collection. While this project focuses on one type of tax (property tax), the insights gained will also be useful in thinking about promoting tax compliance in other tax categories.
Real estate in Liberia is subject to taxation, but compliance levels are very low. Enforcement has been weak due to low administrative capacity (limited databases and billing procedures) and political constraints on implementing the penalties for noncompliance. Very recently, the tax authority developed a property database for central Monrovia and for the first time in many decades has information on property locations, characteristics and ownership. Using this unique setting in which the large majority of property owners have not paid taxes in decades, this project will investigate the effectiveness of different approaches in increasing the number of taxpayers.
The pilot will use interviews and focus groups to identify potential interventions that can be used in testing different theories from the tax compliance literature.
A key result of the Allingham-Sandmo (1972) model of tax evasion is that increased audit (detection) rates will increase tax compliance. However, this model along with much of the current literature, implicitly assumes that detection of noncompliance will trigger the penalties associated with it. However, in many developing countries, the authorities face political constraints on their ability to enforce punishments. The pilot will thus seek to examine what approaches will change perceptions of a government’s monitoring capacity and, separately, its enforcement capacity and how these two interact.
Similarly, the pilot will help understand perceptions of property owners of the relationship between public services and tax compliance. In Liberia, the low level of public services provided is often cited as a rationale for noncompliance, yet there have been improvements in service delivery over the last few years. The pilot will explore whether highlighting the incremental changes can potentially affect compliance behavior. It will also explore the importance of having benefits that are restricted to tax payers.