Asymmetry in Civic Information: An Experiment on Tax Incidence among SMEs in Togo
Asymmetry in Civic Information: An Experiment on TaxParticipation among Small and Informal Firms in Togo
In many low-income countries, there is a wedge between the statutory policies on tax compliance and the practice on the ground, especially for the taxation of informal firms. Asymmetric information about the nature of these firms' civic responsibility to pay taxes leaves much discretion to tax collectors and leads to variation in practices and further distrust and confusion among taxpayers and the tax authority. We ran a randomized controlled trial with 424 firms in Lome, Togo, to investigate whether alleviating this informational asymmetry improves tax incidence. We randomly assigned half of the sample to an informational and training treatment about tax procedures and obligations as well as the use of tax revenues to provide public services. Treated firms, who we show are now better informed, participate less in the tax system on the extensive margin with a change in the composition of firms who participated. Fewer low revenue firms paid taxes as would be expected in accordance with the regulations. This positive sorting by firm revenue, not only is welfare enhancing but may, on the net, increase total tax revenues.
The often observed wedge between statutory policies and on-the-ground enforcement practices in low-income countries for the taxation of small, informal firms may stem from an asymmetry of information about the law. We test this hypothesis in a randomized controlled trial in Lome, Togo by training firms about the tax code and assessing the effect on their tax participation and economic activities. We find that tax participation decreased, driven bylow-revenue firms, and their economic activities expanded. Overall tax revenues increased, suggesting that aggressive taxation under asymmetric civicinformation is likely regressive and counterproductive for firms’ activities andgovernment revenues.