Taxation

Editor's Note: This section draws primarily on Jensen and Weigel (2024): “No Taxation without the State: Bringing the State back into the Study of Tax Capacity”, Working paper. Please refer to the paper for a more detailed review. See also Okunogbe and Tourek (2024, Journal of Economic Perspectives) for a review of evidence on tax administrations.

So far, we have discussed evidence on the determinants of enforcement and how constraints on effective taxation impact policy design. Tax authorities play an important role in shaping enforcement and policy. In this section, we review evidence on tax authorities, focusing on two main areas: administrative reforms and communication with taxpayers. Administrative reforms and communication strategies sometimes serve a purpose of directly strengthening enforcement, but they often serve additional objectives in a tax system such as improving the ability of government to implement a policy as initially intended and strengthening tax morale by making the collection process more systematic and predictable. We emphasise administration and communication as two ‘building blocks’ of a well functioning tax authority that are feasible policy levers for governments in most settings, including those with lowest levels of initial capacity, and that have potentially beneficial impacts beyond immediate improvements in enforcement.

Administrative reforms: Personnel, rendering the collection process systematic, and legibility

There are several specific strategies through which tax authorities can bolster their administrative capabilities.

Personnel

Firstly, a critical focus area is personnel. The effectiveness of any state endeavour hinges on its human resources (Xu et al. 2023). Without skilled and well-managed tax collectors, inspectors, and auditors, efforts to enhance tax capacity are likely to fall short. Rationalising and professionalising personnel, as advocated by Weber’s ideal bureaucracy, remains paramount. Recent empirical work provides further motivation for thinking about the personnel margin: the individual bureaucrats who make up the state often explain a large share of the variation in state effectiveness (Best et al. 2023) and tax collection is not likely to be an exception. Within personnel, an important policy tool involves optimising the staff-to-taxpayer ratio, perhaps in particular for large firms and high-net-worth individuals. Given the skewed distribution of corporate and individual income in most settings, establishing specialised units for these segments can significantly enhance scrutiny, communication, and audit probabilities, thereby curbing tax avoidance and evasion. Evidence from Indonesia suggests that medium corporate taxpayer units increased tax revenues by 128% over six years (Basri et al. 2021). Similar units targeting high-net-worth individuals have yielded positive outcomes in countries like Uganda (Kangave et al. 2018).

Furthermore, enhancing recruitment practices to attract and retain high-calibre personnel within tax authorities is crucial. In economies dominated by informal and cash transactions, high human capital is indispensable for accurately assessing liabilities, detecting non-compliance, and implementing effective enforcement strategies. Studies in other sectors of government underscore the efficacy of competitive wages in attracting talent and improving public sector performance (Dal Bo et al. 2013). Such incentives are likely to yield comparable benefits within tax administrations. Khan et al. (2016, 2019) provide evidence on the impact of different incentive structures on local tax collectors’ performance in Pakistan, finding that performance-based compensation, i.e. receiving a higher share of collected taxes as compensation, and performance-based postings, i.e. allowing high-performing tax inspectors to get their top post choices, led to significantly higher collection of taxes.

Alternatively, enhancing the performance of existing tax inspectors through better team and taxpayer assignments can yield substantial improvements. Research indicates that optimal pairing of skilled collectors and strategic assignment to high-revenue potential areas can enhance tax compliance by up to 37% compared to random assignments (Bergeron et al. 2022).

In fragile or low-capacity settings, collaborating with local elites such as chiefs can also enhance tax collection outcomes. Chiefs often enjoy higher legitimacy and possess valuable local knowledge that can complement state efforts. Studies in the DRC highlight that chiefs involved in tax collection outperformed state collectors, increasing tax revenues by 44% despite some instances of increased informal payments (Balán et al. 2022).

Systematising the collection process

In settings of low state capacity, firms’ and households’ interactions with the tax authorities are often unpredictable, idiosyncratic, and arbitrary. Collectors in the field often target certain subgroups for opaque reasons; tax liabilities depend on arrangements and connections; the rich and powerful are often exempt. Rationalising and systematising processes to follow transparent rules, not discretion, is one of the tenets of Weberian bureaucracy. Levi (1989) argues that the fairness and transparency of tax procedures lies at the heart of a strong state because it fosters trust in the integrity of the collection process and underpins tax morale (as we discuss further below). The absence of a regular collection process, and the uncertainty over policy changes, is likely to cause important distortions to firms’ decisions and induce inefficiency through misallocation.

The systematic registration of taxpayers can help patch holes in tax collection and enforcement while also strengthening citizens’ motivations to pay. In the DRC, Weigel and Ngindu (2023) study a campaign regularising property tax collection, from the systematic registration of properties with unique taxpayer IDs to the use of handheld tablets to issue receipts to taxpayers. The registration achieved near-universal coverage – a major increase in regularisation relative to the status quo where registration was sporadic and seemingly arbitrary. This campaign increased tax compliance by over 10 percentage points, largely because of the mechanical increase in the tax base. The campaign also improved citizens’ attitudes about the government, which might have independently increased compliance. In Senegal, Knebelmann et al. (2023) provide experimental evidence showing that when tax officials have discretion in the valuation method, the resulting profile of local property taxes becomes more regressive.

Attempts to render the collection process more systematic can also be implemented at later stages of the collection process. In a collaboration with the tax authority in Tajikistan, Okunogbe and Pouliquen (2022) study electronic filing, which regularises the filing and payment process. The system they study first loads pre-recorded information to create a common, automated starting point for filing; second, it removes the need for physical collection of forms which may otherwise create idiosyncratic differences in filing across taxpayers; third, it removes the need for in-person interactions with tax officials, which may create systematic differences in exposure to coercive or collusive bribes by officials. Although e-filing did not cause an average increase in tax revenue, it made the distribution of tax payments more equitable.

Legibility: Breadth and depth of state’s knowledge

While the public finance literature has focused on the importance of third-party information trails (Section 3), information has been interpreted more broadly in the political science literature. Here, information matters for ‘legibility’ – the breadth and depth of the state’s knowledge about its citizens and their activities (Scott 1999, Lee and Zhang 2017). Outside of third-party information trails, how can tax authorities make taxpayer activities more legible?

Bowles (2024) studies a civil registration campaign in Tanzania and its impacts on tax compliance and access to public resources. Bowles finds that the reform caused a large increase in the likelihood of being registered. Moreover, Bowles finds individuals that are induced to become ‘legible’ to the state through this campaign are more likely to access certain public resources in education (attending secondary and university) and social security (access to state pension). Bowles also finds that this ‘legibility’-reform increased tax compliance amongst registered citizens, based on self-reported survey data. In Liberia, Okunogbe (2021) studies a recent legibility-effort by the Liberian Revenue Authority (LRA), where the tax authority directly built registries by having enumerators go door-to-door to collect basic information about the property and its owner. Okunogbe shows that the LRA can use this systematic information to improve the extent of identification capacity, as well as detection capacity (ascertain the true value of the tax base) and enforcement capacity (enforce unpaid tax liabilities).

The seminal work by Scott (1999) emphasises that information gathering by government officials will only strengthen legibility if the collected information is locally relevant and appropriate. Balán et al. (2022) investigate the importance of local information in the context of property tax collection in the DRC. This research shows how local chiefs are able to draw on their extensive knowledge about individual households to focus their collection efforts on those with a higher propensity to pay. These chiefs are analogous to the types of local elites whose states have engaged in tax collection historically and in many African countries today. The authors also study a group where central collectors met with local leaders. In these meetings, the chiefs tried to codify and transfer knowledge to the central collectors about individual households’ propensity to pay. This treatment performed better than the central collectors, though it did not close the gap to the local chiefs’ performance. This additional result shows that information held by local community leaders may be helpful to the state, but with limits.

Dzansi et al. (2024) experimentally study how official tax collectors directly build locally relevant information in the field. The experiment randomises the use of a new technology designed to help revenue collectors locate property owners to deliver tax bills, which is a major challenge in many low- and middle-income countries with incomplete property addressing. The technology increased bill deliveries by 27% and, surprisingly, increased tax collections by 103%. This is consistent with revenue collectors responding to the new technology by shifting their allocation of time towards learning about households’ propensity to pay, which is initially hard to observe, and subsequently collecting from those with the highest payment propensity. This research highlights how a technology that is designed to relax one constraint ultimately relaxes multiple additional constraints once behavioural changes by users of the technology are taken into account; building local knowledge is one of the important activities that officials decide to reallocate time towards. These studies show how governments can improve the state’s legibility even in contexts like the local property tax in Ghana and DRC where third-party information is effectively non-existent.

Communication: Intrinsic Motivation, Social Considerations, Fiscal Contract

Tax authorities can improve their functioning by implementing appropriate communication with taxpayers. Beyond merely conveying tax liabilities, transparent and clear communication can play a crucial role in shaping taxpayers' perceptions of the state. It can influence their beliefs about the state's ability to detect noncompliance, its commitment to investing tax revenues in public goods rather than rent-seeking, and the fairness of tax burden distribution. These perceptions, in turn, may impact taxpayer compliance. In this context, optimising communication strategies may bolster tax morale—the set of non-monetary motivations driving tax compliance. Our synthesis of evidence across different contexts (outlined below) refutes the notion that non-monetary factors have no bearing on actual tax behaviour. It is, therefore, perhaps precisely in environments where enforcement constraints are more present that cultivating tax morale becomes a potentially important lever for compliance. We focus on intrinsic motivations, social dynamics, reciprocity, and public goods, motivated by the classification used in Luttmer and Singhal (2014).

Intrinsic motivation

Intrinsic motivation is the set of privately held beliefs, perceptions and feelings that impact tax compliance. Intrinsic motivation may relate to individuals’ perceptions and expectations of a duty to comply with the law. Intrinsic motivation may also relate to individuals’ sense of positive self-view, warm glow or pride that are often associated with honesty and the fulfilment of civic duties and altruism towards others. Finally, intrinsic motivation is related to individuals’ trust in others and in the government, which in turn can affect their willingness to contribute to the provision of general public goods.

Tax authorities have employed communication strategies to foster intrinsic motivation among taxpayers. However, the effectiveness of these strategies varies. Hallsworth (2014) reviews studies from high-income countries, while Mascagni (2018) examines evidence from low- and middle-income countries, highlighting mixed results. Dwenger et al. (2016) provide direct evidence on intrinsic motives by studying tax payment behaviour in a setting with minimal enforcement: the local church tax in Bavaria. They find that 20% of taxpayers pay exactly what they owe, possibly driven by a sense of duty, while 80% evade taxes, revealing significant variability likely linked to intrinsic motivation. Bergolo et al. (2020) in Uruguay use survey data and laboratory games to measure intrinsic motivation proxies, such as attitudes towards tax honesty and moral justifiability of evasion, finding substantial heterogeneity among taxpayers. However, these proxies show limited association with actual tax evasion rates. Cullen et al. (2021) explore the relationship between political alignment, trust in government, and tax evasion in the US. Their findings suggest that political alignment with the governing party correlates with higher trust in government and reduced tax evasion.

Perceptions of fairness, including redistributive and procedural aspects, are critical to intrinsic motivation for tax compliance. Redistributive fairness ensures that taxes reflect individuals' ability to pay, preventing feelings of unfairness that could undermine compliance. Some studies highlight this link, including on the poll tax in the UK (Besley et al. 2023). Procedural fairness concerns whether the tax system adheres to its intended rules and schedules. Levy (1998) argues that transparent and fair tax procedures are essential for fostering voluntary compliance. Horizontal inequity, where similar groups face different tax burdens, can indicate procedural unfairness (Scheve and Stasavage 2018). 

Social considerations

Individual tax decisions can be influenced by social norms and interactions in several ways. Firstly, there is a social conformity effect, where individuals derive psychological payoffs from adhering to standard behavioural patterns within their reference group. Secondly, through social learning, observing others' behaviour allows individuals to understand the enforcement environment better, discover new tax strategies, and gain insights into the tax system overall. Thirdly, by comparing their own tax situation to others', individuals form beliefs about the fairness of the tax system, known as the social fairness effect.

Tax authorities worldwide have implemented communication strategies that provide aggregate information on taxpayer behaviour. Hallsworth (2014), in a review of 22 experiments, found mixed results from these strategies. The impact of social information messages may depend on underlying norms and individual beliefs, contributing to observed variations in effectiveness. Beyond experiments, studies like Drago et al. (2020) show that compliance behaviour spreads through neighbourhood networks in Austria, indicating significant social effects. Similarly, Nathan et al. (2024) demonstrated that informing property owners in Texas about their tax perceptions relative to averages influences their likelihood to protest tax liabilities.

These studies challenge canonical taxpayer models by demonstrating that tax decisions are influenced by social contexts rather than being isolated actions. Publicly disclosing tax information or implementing shame and honour programmes, as observed in Pakistan and Slovenia (Slemrod et al. 2022, Dwenger and Treber 2018), may effectively enhance compliance. However, concerns in low- and middle-income countries include signalling weak enforcement and potentially reinforcing non-compliance among extrinsically motivated taxpayers. Perez-Truglia and Troiano (2018) highlights that public visibility of tax debtors increases payment likelihood, but only for smaller debts. Moreover, it is important to consider the local context when designing these disclosure policies. Manwaring and Regan (2023) find that property owners in Uganda consider it to be socially costly to be known as tax-eligible, while social sanctions for tax delinquency are limited. 

Social reciprocity

Reciprocity is the relationship that citizens have with the state in relation to the delivery of public goods and services. Individuals may consider this a social contract (or fiscal exchange): tax payments are made in exchange for services and public goods provided by the state. Besley (2020) studies the role of civic culture in expanding tax capacity, based on a model of reciprocal obligations where citizens pay their taxes and the state provides public goods. Recent work has provided evidence showing that, as the government extracts more taxes, citizens in return demand more from the government (see Gadenne 2017, Weigel 2020).

Evidence reviewed in Hallsworth (2014) shows that information provision about actual public goods has produced mixed results on tax payments in highly developed countries. In low- and middle-income countries, Castro and Scartascini (2015) find null effects on tax compliance in Argentina, while Mascagani and Nell (2022) find large positive effects of public expenditure information amongst corporate taxpayers in Rwanda. Interestingly, while information treatments have muted impacts on compliance, they do seem to impact taxpayers’ beliefs and attitudes. Conducting survey experiments in 17 Latin American cities, Ortega et al. (2016) find that information on actual public goods delivery does lead to increases in respondents’ appreciation of the value of public goods, but has no impact on tax compliance. Similarly to the literature on information treatments about inequality (Kuziemko et al. 2015), these results could reflect citizens’ theoretical appreciation of the social contract combined with their practical distrust in government’s ability to improve this fiscal exchange.

One implication of this interpretation is that actual changes in the delivery of public goods may stimulate taxpayers’ willingness to reciprocate more than the communication about public goods. Carillo et al. (2021) study a programme in Santa Fe, Argentina, where taxpayers without outstanding property tax debt were eligible to win a lottery prize which consisted in the construction or renovation of the sidewalk immediately in front of their house. The authors find positive tax compliance impacts of winning the lottery for up to three years, both for the lottery winner and for the winner’s neighbours. In particular, the existence of an effect amongst neighbours is consistent with reciprocity – if neighbours benefit from the provided good, or visualise the provision of the good, it may increase their belief that the government is honouring the fiscal contract. Krause (2020) conducts an RCT in Port-au-Prince, finding positive impacts of public goods provision (in the form of waste management) on tax payments. Finally, in an on-going study in Punjab, Khwaja et al. (2020) experimentally study different ways to improve the link between local taxation and urban services: one treatment strengthens the geographical link from tax payment to service delivery by ensuring that the local government commits to allocating 35% of taxes to funding public goods in the same neighbourhood where they were collected; another treatment stimulates citizen voice, by eliciting taxpayer preferences on the local goods that should be prioritised. Preliminary results show limited but positive impacts on actual tax payments and attitudes towards government. Finally, Brockmeyer et al. (2024) leverage the randomised provision of urban infrastructure in Mexico City, but find that compliance did not change amongst households living in communities where there was an increase in public goods provision.

References

Balán, P, A Bergeron, G Tourek, and J L Weigel (2022), "Local elites as state capacity: How city chiefs use local information to increase tax compliance in the Democratic Republic of the Congo", American Economic Review, 112(3): 762-797.

Basri, M C, M Felix, R Hanna, and B A Olken (2021), "Tax administration versus tax rates: Evidence from corporate taxation in Indonesia", American Economic Review, 111(12): 3827-3871.

Best, M C, J Hjort, and D Szakonyi (2023), "Individuals and organizations as sources of state effectiveness", American Economic Review, 113(8): 2121-2167.

Bergeron, A, P Bessone, J K Kabeya, G Z Tourek, and J L Weigel (2022), "Optimal assignment of bureaucrats: Evidence from randomly assigned tax collectors in the DRC", National Bureau of Economic Research, No. w30413.

Bowles, J (2024), "Identifying the rich: Registration, taxation, and access to the state in Tanzania", American Political Science Review, 118(2): 602-618.

Brockmeyer, A, G Mascagni, V Nair, M Waseem, and M Almunia (2024), "Does the value-added tax add value? Lessons using administrative data from a diverse set of countries", Journal of Economic Perspectives, 38(1): 107-132.

Carillo, P E, E Castro, and C Scartascini (2021), "Public good provision and property tax compliance: Evidence from a natural experiment", Journal of Public Economics, 198: 104422.

Castro, L, and C Scartascini (2015), "Tax compliance and enforcement in the pampas: Evidence from a field experiment", Journal of Economic Behavior & Organization, 116: 65-82.

Cullen, J B, N Turner, and E Washington (2021), "Political alignment, attitudes toward government, and tax evasion", American Economic Journal: Economic Policy, 13(3): 135-166.

Dal Bó, E, F Finan, and M A Rossi (2013), "Strengthening state capabilities: The role of financial incentives in the call to public service", Quarterly Journal of Economics, 128(3): 1169–1218.

Drago, F, F Mengel, and C Traxler (2020), "Compliance behavior in networks: Evidence from a field experiment", American Economic Journal: Applied Economics, 12(2): 96–133.

Dwenger, N, H Kleven, I Rasul, and J Rincke (2016), "Extrinsic and intrinsic motivations for tax compliance: Evidence from a field experiment in Germany", American Economic Journal: Economic Policy, 8(3): 203-232.

Dwenger, N, and L Treber (2018), "Shaming for tax enforcement: Evidence from a new policy", Unpublished.

Gadenne, L (2017), "Tax me, but spend wisely? Sources of public finance and government accountability", American Economic Journal: Applied Economics: 274-314.

Hallsworth, M (2014), "The use of field experiments to increase tax compliance", Oxford Review of Economic Policy, 30(4): 658–679.

Jensen, A, and J L Weigel (2024), "No taxation without the state: Bringing the state back into the study of tax capacity", Unpublished manuscript.

Kangave, J, S Nakato, R Waiswa, M Nalukwago, and P Lumala Zzimbe (2018), "Taxing high net worth individuals: Lessons from the Uganda Revenue Authority’s experience", ICTD.

Khan, A Q, A I Khwaja, and B A Olken (2016), "Tax farming redux: Experimental evidence on performance pay for tax collectors", Quarterly Journal of Economics, 131(1): 219-271.

Khan, A Q, A I Khwaja, and B A Olken (2019), "Making moves matter: Experimental evidence on incentivizing bureaucrats through performance-based postings", American Economic Review, 109(1): 237-270.

Khwaja, A I, O Haq, A Q Khan, B Olken, and M Shaukat (2020), "Rebuilding the social compact: Urban service delivery and property taxes in Pakistan", 3ie Impact Evaluation Report 117. New Delhi: International Initiative for Impact Evaluation (3ie).

Knebelmann, J, V Pouliquen, and B Sarr (2023), “Discretion versus Algorithms: Bureaucrats and Tax Equity in Senegal”, Working Paper.

Krause, B (2020), "Balancing purse and peace: Tax collection, public goods and protests", Berkeley, CA: Agricultural and Resource Economics, University of California, Berkeley.

Kuziemko, I, M I Norton, E Saez, and S Stantcheva (2015), "How elastic are preferences for redistribution? Evidence from randomized survey experiments", American Economic Review, 105(4): 1478-1508.

Lee, M M, and N Zhang (2017), "Legibility and the informational foundations of state capacity", The Journal of Politics, 79(1): 118-132.

Levi, M (1989), Of rule and revenue, California Series on Social Choice and Political Economy, Berkeley: Univ. Calif. Press 253.

Luttmer, E F P, and M Singhal (2014), "Tax morale", Journal of Economic Perspectives, 28(4): 149-168. 

Manwaring, P, and T Regan (2023), "Public disclosure and tax compliance: Evidence from Uganda", Centre for the Study of African Economies.

Mascagni, G (2018), "From the lab to the field: A review of tax experiments", Journal of Economic Surveys, 32(2): 273-301.

Mascagni, G, and C Nell (2022), "Tax compliance in Rwanda: Evidence from a message field experiment", Economic Development and Cultural Change, 70(2): 587-623.

Nathan, B C, R Perez-Truglia, and A Zentner (2024), "Paying your fair share: Perceived fairness and tax compliance", National Bureau of Economic Research, No. w32588.

Okunogbe, O (2021), "Becoming legible to the state: The role of identification and collection capacity in taxation", Policy Research Working Paper No. WPS 9852. Washington, D.C.: World Bank Group.

Okunogbe, O, and G Tourek (2024), "How can lower-income countries collect more taxes? The role of technology, tax agents, and politics", Journal of Economic Perspectives, 38(1): 81-106.

Okunogbe, O, and V Pouliquen (2022), “Technology, Taxation, and Corruption: Evidence from the Introduction of Electronic Tax Filing”, American Economic Journal: Economic Policy, 14(1): 341-372.

Ortega, D, L Ronconi, and P Sanguinetti (2016), "Reciprocity and willingness to pay taxes: Evidence from a survey experiment in Latin America", Economía, 16(2): 55-87.

Perez-Truglia, R, and U Troiano (2018), "Shaming tax delinquents", Journal of Public Economics, 167: 120-137.

Scott, J C (1999), Seeing like a state: How certain schemes to improve the human condition have failed, New Haven, CT: Yale University Press.

Slemrod, J, O U Rehman, and M Waseem (2022), "How do taxpayers respond to public disclosure and social recognition programs? Evidence from Pakistan", Review of Economics and Statistics, 104(1): 116-132.

Weigel, J L, and E Kabue Ngindu (2023), "The taxman cometh: Pathways out of a low-capacity trap in the Democratic Republic of the Congo", Economica, 90(360): 1362-1396.

Xu, G, E Deserranno, D Moreira, and E Teso (2023), “Bureaucracy”, VoxDevLit, 8.1.