Tax capacity and state accountability: Firm owner and taxpayer responses to information

How can low-cost methods of encouraging tax compliance in developing countries be most effectively constructed to encourage both new and current taxpayers? How does taxation lead to the demand for governmental accountability? There are various studies which have measured the impact of government-sponsored messages on the behaviour of firms and taxpayers. Generally, threats of audit have been found to be the most effective in improving compliance (e.g., Coleman (1996), Slemrod et al (2001), Kleven et al (2011), Pomeranz (2013)). Messages which appeal to a taxpayer’s civic duty have had more mixed effects: weakly positive (e.g., Ortega and Sanguinetti (2013)), no effect (e.g. Blumenthal et al (2001)), or decreased collections (e.g., Ariel (2012)).

Unlike the Organisation for Economic Co-operation and Development (OECD) countries where most research has taken place, developing countries often lack the ability to enforce tax policy. For example, Uganda has over 700,000 active taxpayers, but conducts fewer than 400 audits per year, roughly 1/60th of the audit rate in the United States. Low-cost encouragement methods, such as education and information campaigns, are therefore crucial to increase revenue from taxation. For example, Mascagni et al (2017) examined the drivers of compliance for Rwanda’s business profits tax, and found that both friendly reminders and deterrence can be effective, with SMS and emails more cost-effective compared to letters.

This research project will test different low-cost methods of encouraging taxpayers to correctly file and pay taxes owed from self-employment and business income. The first part of the study will focus on taxpayers who have registered with the government that may owe tax on business income, but have never paid it. The second part of the study will focus on taxpayers who have previously paid the tax, but who may be underreporting their profits, and therefore underpaying.

Jointly, these schemes will help the Uganda Revenue Authority to uncover low-cost and effective ways to improve tax collection. By also surveying a randomly selected subset of taxpayers by phone, we will also come to understand how paying taxes changes taxpayer engagement with the state, and, specifically, whether new taxpayers become more engaged with their government.

Outputs

  • Blog post

    Collecting tax revenue in Uganda: The carrot and stick story

    Text messages focused on enforcement and information are most effective at collecting tax revenue, while encouragement affects the average taxpayer only with visible benefits. We collaborated with the Ugandan Revenue Authority to test whether and what types of text message reminders help raise government revenue. Specifically, we used an experiment to test how effective...

    19 Jan 2022 | Isabelle Cohen, Nicholas Musoke