Tax Farming Redux: Experimental Evidence on Incentive Pay for Tax Collectors by Dr. Asim Khwaja

PSSP SEMINAR SERIES

presents

Tax Farming Redux: Experimental Evidence on Incentive Pay for Tax Collectors

http://econ.duke.edu/erid/conferences/islam-and-economic-development/presenters

source: econ.duke.edu

A discussion with

Asim Khwaja

Sumitomo-Foundation for Advanced Studies on International Development Professor of International Finance and Development,
Harvard Kennedy School

Thursday, 19 December 2013
12:00pm – 1:15pm

 

7AB Conference Room
International Food Policy Research Institute
2033 K Street, NW, Washington, DC 20006-1002 USA


ABSTRACT

An important question in the design of a civil service system is the role of incentives. In tax, high-powered incentives for tax collectors could increase effort and revenues, but it might come at a high political cost if taxpayers experience greater pressure by collectors especially if the latter resort to extortion and over-taxation. We report the results of the first large-scale, randomized field experiment designed to investigate these issues. Working with the Punjab, Pakistan provincial government, we experimentally allocated collectors in the in the entire provincial property tax department, consisting of 482 property tax circles, into one of three high-powered incentive schemes or a control group. Two years later, we find that incentivized  circles showed 8 percent higher collections than the control, with the increased revenue coming from an expanded tax base and far exceeding the cost of the incentives. Yet incentivized circles do report greater taxpayer discontent. Moreover, while we find that the incentive scheme that rewarded purely on collection performs better in terms of tax revenue raised, it does no worse on customer satisfaction and assessment accuracy compared to the two other schemes that explicitly rewarded these non-revenue margins. However, digging deeper into our findings reveals an interesting heterogeneity. Despite reporting no increase in an index of overall corruption, the average taxpayer in incentivized circles reports higher level of bribes and instances of corruption. In contrast, conditional on their property being reassessed, which typically leads to higher level of tax, tax payers report lower levels of bribes and instances of corruption. These results are consistent with a world with collusion between collector and taxpayer in which the increased return to the collector for raising tax changes the bargaining process between them. As a result taxpayers in incentivized circles either have to pay higher bribes to avoid being reassessed or end up having to pay substantially higher taxes if the bargaining process breaks down. Our results therefore suggest that while incentives for tax collectors can substantially boost revenue collected and lead to little overall discontent, they do empower the tax collector in a manner that can both lead to increased revenue and rents at the expense of the taxpayer.

Asim Khwaja is the Sumitomo-Foundation for Advanced Studies on International Development Professor of International Finance and Development at the Harvard Kennedy School, Co-Director of Evidence for Policy Design (EPoD), and faculty co-chair of the MPA/ID program. His areas of interest include economic development, finance, education, political economy, institutions, and contract theory/mechanism design. His research combines extensive fieldwork, rigorous empirical analysis, and microeconomic theory to answer questions that are motivated by and engage with policy. His recent work ranges from understanding market failures in emerging financial markets to examining the private education market in low-income countries. He was selected as a Carnegie Scholar in 2009 to pursue research on how religious institutions impact individual beliefs. Khwaja received BS degrees in economics and in mathematics with computer science from MIT and a PhD in economics from Harvard.

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