Liquidity constraints, presumptive taxation, and tax compliance: Experimental evidence from Kenya

Tax evasion generates significant losses in government revenues and can lead to large distortions in the economy. Evasion is of particular concern in developing countries, where the share of the informal economy is typically larger and the government has limited sources of information. Over the last decade, an increasing number of revenue authorities around the world have started collaborating with academic researchers to rigorously evaluate initiatives aimed at increasing tax revenues.

While research on taxation has typically focused on what the tax is levied on and what rates are being applied, this pilot project focuses on the impacts of the timing and frequency of tax payments. Working in partnership with the Kenya Revenue Authority, the research team plans to explore and pilot interventions related to the timing of corporate taxes in Kenya. The project will explore whether improving the match between the cash flow and the timing of tax payments increases compliance among small firms that are subject to turnover tax or to value added tax. For instance, the research team is exploring the possibility that targeted firms could qualify for a cash-accounting system, where taxes are due at the time they receive payments for their sales, rather than at the time of issuing the invoice. Additionally, some firms, currently delinquent for VAT payments, may qualify for payment plans, where firms could commit to an amount to pay and then extinguish their debit gradually over time.

Experimental work has shown that “getting the timing right” increases the adoption of health, agricultural, and financial products in the developing world and it has highlighted the importance of behavioural biases, credit constraints, and saving barriers. This project presents a first attempt to understand the importance of these features for tax compliance and for the impact of taxation on firm development.