Journal Article

Are Tax Rates too High in Developing Countries? Evidence from Randomized Property Tax Rates

Tourek, Gabriel, Weigel, Jonathan L., Bergeron, Augustin

2019

Overview

How should tax rates be set in developing countries? This project estimates the elasticity of property tax compliance and tax revenue in a field experiment in Kananga, D.R. Congo, a setting with very low tax compliance. In collaboration with the provincial government, we randomly assign four tax rates at the household level as part of a door-to-door city-wide property tax campaign covering 48,000 properties. Property owners randomly face the status quo tax liability or a reduction of 17%, 33% or 50% in their tax liability. We find that the elasticity of tax compliance with respect to the tax rate is -1.19 and the elasticity of tax revenue with respect to the tax rate is -0.26, suggesting that tax rates are on the wrong side of the Laffer curve and that the government could increase revenues by lowering tax rates. We also find that beyond higher revenues, lowering tax rates results in lower amounts of bribes being collected and improves citizens’ view of the government. Finally, we document further policy implications resulting from the substantial heterogeneity in the elasticity of tax revenue with respect to the tax rate. First, we use heterogeneous treatment effects to show that a progressive tax schedule would maximize revenue. Second, we use tax collector heterogeneity to show that an increase in government’s enforcement capacity would permit higher tax rates.

• Publisher: National Tax Association
• Subject: Tax Expenditures in Developing Economies