Fiscal Exchange and Tax Compliance

Question 1

What is the motivation behind studying taxation and fiscal exchange?

Answer 1

• Ability to tax is central to state development (provision of public services, decreased dependence on aid money)
• low-income countries collect little tax revenue (tax-GDP ration 16% in African versus 34% in OECD countries), particularly low in Sierra Leone (12%)
• Tax compliance is a major challenge: due to low state capacity + high cost, role of salient social contract for quasi-voluntary compliance
• Growing literature on tax morale emphasizing the idea of fiscal exchange
  > general messages: necessity of tax reveneue for public service provision, aggregate infromation about use of resources
  > consensus that these messages have littel effect on tax compliance

Question 2

What is the research question of Laura’s paper on public service information and tax compliance?

Answer 2

Can the provision of information about specific services increase tax compliance?

Question 3

What is the setup of the paper on public service information and tax compliance?

Answer 3

• Sierra Leone, Freetown
• Field experiment with 5500 residents of registered properties
  Treatment:
• Match treatment (information about one’s most preferred type of service), Mismatch treatment (Information about one’s least preferred type of service)
• Treatment conducted via phone call
• reminder SMS immediately after the call

Outcome: property tax compliance

Question 4

What are the findings of the paper on public service information and tax compliance?

Answer 4

• 20% increase in timely tax payments (average effect)
• Mechanisms differ by public service dependence
  a) Poor individuals: personal benefit of public service provision matters
  b) Rich individuals: extent of new information matters -> individuals pay more, not just earlier
• Effects are not explained by (a) awareness effect, (b) fear of detection when non-compliant

Question 5

What is the property taxation rule in Freetown relevant for the paper on public service information and tax compliance?

Answer 5

• property tax based on floor area + property characteristics
• Point-based tax rate: 2.5% for domestic properties

Payment logistics:
* January - March: Issue of rate demand notes
* September 30th: official payment deadline (5% penalty)
* payments can be made in installments

Enforcement:
* monetary penalties, accumulating over time
* seizure of properties (in theory)
* prosecution of defaulters at court (in theory)
> in 2021, taxes were paid for only 22% of registered properties
> property tax makes up the majority of local government budget

Question 6

What data is used in the paper on public service information and tax compliance?

Answer 6

• Administrative data (tax registry)
• Geo-referenced data on public services: 277 service locations
• Survey data: baseline & endline on public service preferences

Question 7

What are the baseline preferences regarding public services in the paper on public service information and tax compliance?

Answer 7

• Access to water as most preferred service
• Environmental management and disaster management as least preferred services

Question 8

Explain the timeline in the paper on public service information and tax compliance.

Answer 8

Feb 2022: Baseline survey
March-April 2022: Intervention
April 2022: Endline survey
until June 2023: Administrative Data

Question 9

What are the policy implications of the paper on public service information and tax compliance?

Answer 9

• with 3660 treated individuals, intervention increased timely payments by 5600 $
• Scalling up to all 47k eligible properties, it could rause up to 71k$
• on average, the intervention raises 1.7 - 3.6 times its cost

Question 10

What are the tax compliance mechanisms by treatment arms in the paper on on public service information and tax compliance?

Answer 10

• Messages about public services:
  a) Poor individuals: perceived personal benefit or public service provision –> match treatment most effective
  b) Rich individuals: new information about the provision of public services
  –> mistmatch treatment most effective
• Poor households increase tax compliance in response to information about water at close distance (true for both the match and the mismatch treatment)
• Excluded channels
  a) Fear of detection when non-compliant no significant effects on perceived extractive capacity
  b) tax awareness: likely through baseline survey, content of the message matters

Question 11

Sum up the findings of the paper on public service information and tax compliance.

Answer 11

• Specific information about public services increases tax compliance: 20% increase in amount paid on time
• Public service mechanism works differently depending on extent to which individuals rely on public service provision: poor individuals > perceived personal benefit, rich individuals > information
• Effects on fear of enforcement & tax awareness do not explain the effects
• Treatment not only induces earlier payment but actually increases compliance