DP15983 Taxing Property in Developing Countries: Theory and Evidence from Mexico

Author(s): Anne Brockmeyer, Alejandro Estefan, Karina Ramírez Arras, Juan Carlos Suárez Serrato
Publication Date: March 2021
Keyword(s): administrative capacity, liquidity constraints, Property taxation, tax compliance
JEL(s): H21, H26, H71, O23
Programme Areas: Public Economics, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15983

Property taxes in developing countries are plagued by noncompliance and can exacerbate liquidity constraints. We characterize optimal enforcement and taxation policies as functions of revenue elasticities and measures of taxpayer hardship. We estimate these parameters using multiple sources of variation and administrative data from Mexico City. Both rate increases and enhanced enforcement raise revenue, but liquidity constraints also shape taxpayer behavior. Despite the presence of liquidity constraints, we find that raising tax rates increases welfare. In contrast, enforcement generates higher private costs than welfare benefits. On the margin, welfare-maximizing governments would prefer to increase tax rates rather than enhance enforcement.