Assistant Professor of Political Science, University of North Carolina at Chapel Hill
Many developing countries appear stuck in a cycle of low state capacity: insufficient tax revenues limit public goods provision, but citizens will not pay taxes until governance improves. There is limited empirical evidence surrounding how to interrupt this cycle, especially whether it is more effective to improve the state’s capacity to monitor and enforce taxation, or to instead strengthen taxpayers’ motivation to pay taxes voluntarily. This paper presents the results of a field experiment on tax compliance and revenues conducted in 128 markets in Malawi. We use a 2×2 factorial design to compare the effectiveness of two capacity-building interventions: one that focused on improving top-down enforcement, and one that focused on improving accountability relationships and citizens’ willingness to pay taxes voluntarily.
We find encouraging evidence that the interventions increased tax compliance. The bottom-up treatment significantly increased the share of vendors who have tax payment receipt, which is the measure of tax compliance least vulnerable to measurement error. While we also find higher revenues in the top-down treatment markets at endline, we cannot eliminate the possibility that there were pre-treatment differences in revenue levels. Additional results suggest causal mechanisms. The bottom-up intervention bundle significantly increased vendors’ satisfaction with services and their belief that paying taxes is a duty. In the top-down treatment group, vendors were more likely to report that they paid taxes because there were consequences if they did not, tax collectors report working longer hours, and vendors perceived lower bribe-taking. These findings suggest that local revenue collection can be kickstarted in a developing context, particularly by enhancing accountability and transparency surrounding tax revenue to, in turn, increase taxpayers’ willingness to pay taxes.