The State Capacity Ceiling On Tax Rates: Evidence From Randomized Tax Abatements In The Drc

How can developing countries increase the tax revenue they collect? In collaboration with the Provincial Government of Kasaï-Central, we study a policy experiment in the D.R. Congo that randomly assigned 38,028 property owners to different property tax liabilities. We find that status quo tax rates...

Full description

Saved in:
Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Bergeron, Augustin, Tourek, Gabriel, Weigel, Jonathan
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2021
Subjects
Developing countries
Enforcement
LDCs
Property taxes
Tax rates
Online AccessGet full text

Cover

More Information
Summary:How can developing countries increase the tax revenue they collect? In collaboration with the Provincial Government of Kasaï-Central, we study a policy experiment in the D.R. Congo that randomly assigned 38,028 property owners to different property tax liabilities. We find that status quo tax rates are above the revenue-maximizing tax rate (RMTR). Reducing the property tax rate by approximately 34% would maximize government revenue, by increasing tax compliance. We then investigate how responses to tax rates interact with enforcement. We exploit two sources of variation in enforcement - randomized enforcement letters and random assignment of tax collectors - and show that the RMTR increases with enforcement. Replacing tax collectors in the bottom quartile of enforcement capacity by average collectors would raise the RMTR by 42%. Tax rates and enforcement are thus complementary levers. While a naive government that sequentially implements the RMTR and increases enforcement would raise revenue by 61%, a sophisticated government that prospectively implements the post-enforcement RMTR would instead raise revenue by 77%. These findings provide experimental evidence that low government enforcement capacity sets a binding ceiling on the revenue-maximizing tax rate in some developing countries, and thereby demonstrates the value of increasing tax rates in tandem with tax enforcement to expand fiscal capacity.