DP16116 THE STATE CAPACITY CEILING ON TAX RATES: EVIDENCE FROM RANDOMIZED TAX ABATEMENTS IN THE DRC

Author(s): Augustin Bergeron, Gabriel Tourek, Jonathan Weigel
Publication Date: May 2021
Keyword(s):
JEL(s): D73, H20, P48
Programme Areas: Public Economics, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16116

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.