Taxation Toward Representation

Policy Context

Strengthening state capacity in low- and middle-income countries requires raising tax revenue while maintaining political stability. The risk of inciting political unrest when attempting to increase taxes may trap governments in a low-tax equilibrium, but public goods provision may improve both tax compliance and political stability.

Despite potential benefits, there is a lack of empirical evidence on how public goods provision, taxation, and the formation of democratic institutions relate to one another.

Study Design

To identify which interventions are most effective for transitions from a zero-tax equilibrium to compliance as the norm, researchers partner with the national tax authority and a local mayor’s office in Haiti to cross-randomize both tax collection and public goods across one of the country’s largest cities (around 600 voter precincts containing 300,000 registered voters). Effects are measured both via administrative data on tax revenue as well as through novel measures of political unrest.

The project also seeks to understand what governments can do to increase citizen engagement in an emerging democracy. Thus, researchers measure whether and how how the government’s transition efforts have affected forms of civic engagement such as voting behavior and participation in informal taxation.

Results and Policy Lessons

Results suggest that hand-delivering property tax invoices reduces individual tax compliance by 48%, and increases independently observed measures of localized political violence by 192%. In contrast, providing a valuable and visible public good (namely municipal garbage removal) increases tax compliance by 27%, and reduces localized political violence by 85%.

Importantly, public goods provision significantly mitigates the adverse effects of tax collection in neighborhoods receiving both treatments. A cost accounting exercise suggests that providing the public good in this setting could pay for itself within the first year. These findings suggest that it may be possible to peacefully shift to a new equilibrium of higher tax compliance with a sufficient initial investment perhaps financed through foreign aid or other transfers.