1: State Capabilities – Public Finance

Chaired by Mr. Tariq Bajwa, Chairman, Federal Board of Revenue, the session opened with a presentation by Bejamin Olken (MIT) who shared the findings of the study “Tax Farming Redux: Experimental Evidence on Incentive Pay for Tax Collections in Punjab”. The researchers of this project, in collaboration the Government of Punjab, experimentally allocated collectors in the entire provincial property tax department into three different incentive schemes. They find that incentivized circles showed 8% higher collections than the control, with the increased revenue mainly coming from an expanded tax base. The incentive in the form of providing a bonus proportional to the amount of tax collected was most (15%) effective in increasing revenue. They find that unofficial payments increase for some taxpayers and decreased for others but overall satisfaction level does not change.

The second presentation of the session was made by Mushfiq Mobarak (Yale University) on “Using Social Incentives to Collect Taxes: A Field Experiment with Firms in Bangladesh”. He rigorously examined a pilot programme to test whether simple social recognition based interventions — sending personalized letters to the firms, providing reward cards on payment of taxes– can raise revenues by improving voluntary firm compliance in Dhaka. The preliminary results of his study shows that these interventions are affective in raising revenues though there is huge heterogeneity in the way different types of firms respond to these incentives.

The third and the final presentation of this session was made by Michael Best of LSE. He showed that salaried workers’ income tax liability is under-reported by at least 10% on average. He also showed how underreporting by firms is mainly in response to changes in tax rates at kink points in the tax schedule. He argued that third-party reporting of salary incomes is largely ineffective at reducing tax evasion in developing countries that have very tax-capacity. He also made several policy recommendations that can help government to increase tax revenue. First, the government should crack down on the cases of misreporting by matching the employer-employee data. Second, they should consider increasing tax rate on salaried income but lower the rate for non-salaried income.

The discussants for this session, Rathin Roy, Director, NIPFP and Surajit Bhalla, Oxus Investment, made several useful comments in the end.

By Chinmaya Kumar, Country Economist, IGC India-Bihar