Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Taxation without documentation

26.05.2011
New study shows ‘informal taxation’ in developing countries is far greater than suspected, supporting public works — and adding a burden for the poor.

Developing countries often lack the official government structure needed to collect taxes efficiently. This lack of systematic tax collection limits the ability of those countries to provide public services that aid growth, such as roads, sanitation and access to water.

But a new study co-authored by MIT economist Benjamin Olken reveals that developing countries actually have extensive informal systems in which citizens contribute money and labor to public-works projects. In effect, local governments in the developing world collect more taxes and produce more public goods than many outsiders have realized, a finding with implications for aid groups and governments trying to decide how to fund anti-poverty projects worldwide.

“It’s really surprising just how many people are doing this, and how prevalent this is,” says Olken, an associate professor in MIT’s Department of Economics. “This is a very common facet of how people experience life in a lot of developing countries. It’s supporting a large share of what’s going on at the village level.”

These informal taxes are generally regressive: While better-off citizens contribute more than the poor do in absolute terms, the percentage of income they pay is lower than the percentage of income that the poor pay. Because organizations such as World Bank sometimes recommend that governments use local co-financing of public-works projects, that means some programs intended to help curb poverty may actually place a larger relative tax burden on the poor.

“For aid groups, it’s useful to know what the distributional implications will be, and compare that to other financing mechanisms,” Olken says. “I hope that people will start thinking about these implications.”

Have asphalt, will organize

The research is presented in a new paper, “Informal Taxation,” by Olken and co-author Monica Singhal, an associate professor of public policy at the Harvard Kennedy School of Government. They examined 10 countries in the developing world and found that in many cases, more than 50 percent of citizens participate in these informal, local taxation schemes. In only one of the 10 nations did fewer than 20 percent of citizens pay additional informal taxes.

That changes our picture of taxation in the developing world. Previous studies have shown that formal, official taxation of households only accounts for 18 percent of taxes collected in the developing world, as opposed to 45 percent of taxes collected in the developed world. Given this fact, informal taxes provide a significant boost to local authorities: In Indonesia, for instance, informal taxes increase the amount of revenue under local control by more than 50 percent.

To conduct the study, Olken, Singhal and assistants from MIT’s Undergraduate Research Opportunities Program examined more than 100 existing field-research surveys, including the World Bank Living Standards Measurement Survey. Those surveys each have sample sizes ranging from about 1,500 to 30,000 people. The countries included in the paper are Albania, Ethiopia, Guatemala, Indonesia, Nigeria, Nicaragua, Panama, the Philippines, Vietnam and Zambia.

The paper is scheduled for publication in the American Economic Journal: Applied Economics later in 2011.

One impetus for the research came from Olken’s own experiences in Indonesia, where he has conducted field research for about a decade. In a village where he was once staying, Olken recalls, “the district government dropped off 29 drums of asphalt, and that was it. So the village had to decide what to do. They had a meeting, figured out how much they needed to pave a road in terms of money and labor, and basically went around the room and assigned contributions to people.”

Researchers have been aware that such practices existed; in Indonesia, these informal systems are called gotong royang, and in Kenya they are called harambee. But while the existing data Olken and Singhal used, such as the World Bank surveys, contain information about local life, that information had not previously been pieced together to create a picture of local taxation practices.

“We’re not the first people to have noticed this phenomenon, but I think this is the first paper to treat it like a tax issue,” Olken says.

“They mentioned the elephant in the room,” says Erzo Luttmer, an associate professor of economics at Dartmouth College. “Asking people to contribute labor to road projects, or to contribute money to replacing the roof on a school building, is a real tax, but it doesn’t show up in most statistics. Nobody had inquired as thoroughly into it until now.”

Give me your money or your labor

Among the quirks of informal taxation in the developing world, Olken notes, is that “it’s not formally enforced through the legal system.” And yet, the size of people’s contributions is not quite voluntary. About 84 percent of households in the survey data report that their levels of taxation are assigned by village or neighborhood leaders.

In many places, those payments can be made either by cash, or by contributing labor to the public-works projects. “The poorer people tend to contribute more in kind, and the richer people tend to do more in cash,” Olken says.

As Olken notes, that option — paying by labor or cash — constitutes what economists call an “optimal screening mechanism,” which adds to the knowledge local leaders have about their neighbors. “This kind of device, letting people do either in cash or in kind, can be a way of getting people … to reveal some information about themselves that you might otherwise not know.”

Luttmer hopes future research will help scholars further understand how citizens make these kinds of decisions. “Are people taxed when they have time to contribute labor?” he asks. “If it’s harvest time, do they have their children or wives attend to their own fields while they contribute labor to the common pool? Which systems lead to the most regressive forms of taxation, and which lead to more progressive tax burdens?”

Caroline McCall | EurekAlert!
Further information:
http://www.mit.edu

More articles from Business and Finance:

nachricht Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

nachricht Europe's microtechnology industry is attuned to growth
10.03.2017 | IVAM Fachverband für Mikrotechnik

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Making lightweight construction suitable for series production

More and more automobile companies are focusing on body parts made of carbon fiber reinforced plastics (CFRP). However, manufacturing and repair costs must be further reduced in order to make CFRP more economical in use. Together with the Volkswagen AG and five other partners in the project HolQueSt 3D, the Laser Zentrum Hannover e.V. (LZH) has developed laser processes for the automatic trimming, drilling and repair of three-dimensional components.

Automated manufacturing processes are the basis for ultimately establishing the series production of CFRP components. In the project HolQueSt 3D, the LZH has...

Im Focus: Wonder material? Novel nanotube structure strengthens thin films for flexible electronics

Reflecting the structure of composites found in nature and the ancient world, researchers at the University of Illinois at Urbana-Champaign have synthesized thin carbon nanotube (CNT) textiles that exhibit both high electrical conductivity and a level of toughness that is about fifty times higher than copper films, currently used in electronics.

"The structural robustness of thin metal films has significant importance for the reliable operation of smart skin and flexible electronics including...

Im Focus: Deep inside Galaxy M87

The nearby, giant radio galaxy M87 hosts a supermassive black hole (BH) and is well-known for its bright jet dominating the spectrum over ten orders of magnitude in frequency. Due to its proximity, jet prominence, and the large black hole mass, M87 is the best laboratory for investigating the formation, acceleration, and collimation of relativistic jets. A research team led by Silke Britzen from the Max Planck Institute for Radio Astronomy in Bonn, Germany, has found strong indication for turbulent processes connecting the accretion disk and the jet of that galaxy providing insights into the longstanding problem of the origin of astrophysical jets.

Supermassive black holes form some of the most enigmatic phenomena in astrophysics. Their enormous energy output is supposed to be generated by the...

Im Focus: A Quantum Low Pass for Photons

Physicists in Garching observe novel quantum effect that limits the number of emitted photons.

The probability to find a certain number of photons inside a laser pulse usually corresponds to a classical distribution of independent events, the so-called...

Im Focus: Microprocessors based on a layer of just three atoms

Microprocessors based on atomically thin materials hold the promise of the evolution of traditional processors as well as new applications in the field of flexible electronics. Now, a TU Wien research team led by Thomas Müller has made a breakthrough in this field as part of an ongoing research project.

Two-dimensional materials, or 2D materials for short, are extremely versatile, although – or often more precisely because – they are made up of just one or a...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Fighting drug resistant tuberculosis – InfectoGnostics meets MYCO-NET² partners in Peru

28.04.2017 | Event News

Expert meeting “Health Business Connect” will connect international medical technology companies

20.04.2017 | Event News

Wenn der Computer das Gehirn austrickst

18.04.2017 | Event News

 
Latest News

Wireless power can drive tiny electronic devices in the GI tract

28.04.2017 | Medical Engineering

Ice cave in Transylvania yields window into region's past

28.04.2017 | Earth Sciences

Nose2Brain – Better Therapy for Multiple Sclerosis

28.04.2017 | Life Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>