Intervention(s)
Within the state-building and taxation literature, the new fiscal sociology strand has emphasized the virtues of greater revenue mobilization at both the local and national level for the democratic future of developing countries. Taxation creates a bargaining arena in which taxpayers can work to foster accountable public institutions (Bräutigam et al, 2008; Martin et al, 2009). For local governance, increasing revenues through greater contributions from real estate is key to delivering public goods. As a salient tax levied for local government budgets, property tax is a prime candidate to achieve this objective. Due to rapid urbanization and substantial investments in owner-occupied and rental units, it offers huge potential (Bahl et al eds. 2008). However, as argued in Besley and Persson (2009), there is no basis for the assumption that developing countries have the necessary institutional capacity to raise taxes. This project, based on a collaboration with Senegal’s revenue authority (Direction générale des Impôts et des Domaines, DGID), aims at evaluating two different interventions which relate to these strands of the taxation and development literature. We have designed these interventions to help the DGID improve its capacity to administer property taxes.
Property taxes have many virtues. First, they ease the informational problem of taxation as the revenue authority computes the liability based on a visible and immobile base. Second, if well administered, they satisfy the two characteristics of a fair distribution of a tax burden, namely the ability-to-pay and the benefit principles. Linked to the first, Sennoga et al (2008) have shown the progressivity of property taxes in developing countries. Regarding the benefit principle, property taxes approximate a user fee as they fund local public goods (Bahl and Martinez-Vazquez, 2008). However, IMF and World Bank revenue statistics show that, between 2000 and 2012, property taxes represent on average of 0.1 to 0.2% of GDP in Sub-Saharan Africa (0.1% in Senegal). In OECD countries, the average range is between 2-3% of GDP. This poor performance suggests considerable scope for improvement. Raising statutory rates or enlarging its base are two options to increase revenue. Improved tax administration could achieve the same objective with lower efficiency losses, through a better system of tax assessment, collection, and enforcement (Keen and Slemrod, 2017).
Three main reasons explain the revenue gap in property taxes in developing countries such as Senegal. First, they are impossible to administer without a functioning fiscal cadaster. Second, if in place, revenue authorities manage fiscal cadaster data without an adequate information technology (IT) system. In particular, the manual management of records hinders the creation of an exhaustive cadaster capable of linking detailed parcel information to individual taxpayers in order to facilitate the production of a credible tax base, annual tax rolls and the surveillance of delinquent taxpayers (Norregaard, 2013). The manual management of records also makes it difficult to trace previous notifications. In addition, weak IT systems require annual field visits and render the surveillance of tax inspectors in charge of property taxes more difficult (Khan et al, 2016). The third reason relates to weak enforcement tools towards non-compliant taxpayers. Because of their salience compared to consumption taxes, property taxes are unpopular (Rosengard, 1998; 2012). Enforcement measures with lasting effects are thus necessary to make the property tax work.
Based on experiences in developing countries (Indonesia, Jamaica, The Philippines; see Rosengard, 1998; 2012), the data-led approach to property tax reform posits that technological upgrades in the collection and processing of property information could increase administrative efficiency. A second approach to property tax reform focuses on increasing voluntary compliance. In both approaches, a positive theory of property tax compliance would be different from the benchmark approach to tax evasion (Allingham and Sandmo, 1972). Unlike the income tax, which has a declaration component, the property tax is not self-assessed and is computed by the revenue authority. Therefore, according to this theory, the key parameter in compliance behavior is the perceived probability of credible enforcement. Our project will seek to elicit mechanisms, which can change this subjective probability.
We propose to assess the importance of these two approaches in an ideal context. DGID has developed an alpha version of a software for its fiscal cadaster censuses in order to phase-out the manual management of records, automate the storage and processing of data collected during field visits and the production of tax rolls. The present version needs to be developed into a mature fully reliable version.
---Our first intervention, with the help of professional applications developers, plans to achieve this objective with the introduction of this software in the property tax information system. We aim at measuring to what extent its use could increase property tax revenues both on the extensive and intensive margins, and to explore the underlying causal channels.
The first channel relates to the effort of tax inspectors. We ask the following question: how does the new informational structure created with this software affect the outputs of tax inspectors? With field information centralized in one database, the work of supervisors is facilitated as they can easily monitor the progress made in issuing notifications and conducting enforcement measures. We hypothesize that the centralization of property information for the production of tax rolls will limit: 1) tax inspectors’ ability to deploy low effort in issuing tax notifications; 2) the extent to which tax inspectors can engage in corruption by either omitting to issue or issuing incorrect notifications.
The second channel relates to taxpayers’ beliefs about the efficiency of the revenue authority in issuing notifications and taking enforcement steps (Powers, 2008). This leads to the following research questions: does the improvement fiscal cadaster survey technology change taxpayers’ perception of the administrative effectiveness in property taxation? Does awareness of the new technology affect their compliance decisions through an increase in the perceived probability of credible enforcement? We will answer these questions through variations in the deployment of the software and through variations in the salience of new technology. We achieve the latter with the delivery of official messages about its capabilities and subsequent administrative effectiveness in tracking delinquent taxpayers. We hypothesize that if taxpayers internalize the improved enforcement capacity of the revenue authority, these communications should increase voluntary compliance.
---Our second intervention relates to tax compliance and more specifically to deterrence and non-deterrence messages in the context of property taxes. A wide range of theoretical and empirical research has studied taxpayer behavior when the perceived probability of enforcement is raised (deterrence) or in response to a range of non-deterrence related communications often defined as tax morale (Slemrod et al, 2001; Dwenger et al, 2016; Luttmer and Singhal, 2014). We plan to use a deterrence message with extracts and provisions of the tax codes on fines, penalties, and escalated enforcement. For non-deterrence messages, we will prioritize the reciprocity (or fiscal exchange) channel. With the growing demand for provision of local public goods, a reciprocity letter aiming to change prior beliefs about local government expenditures could induce greater compliance. In this process, we will answer three questions. First, how do deterrence and reciprocity messages affect compliance in our context? Second, given that compliance related communications have an important dynamic component: do the two approaches lead to sustained changes in the beliefs of taxpayers about the institutional environment beyond the year of the first nudge? Finally, we seek to highlight how these two types of communications interact with the technological improvement of our first intervention to improve compliance.