Asymmetry in Civic Information

Moussa Blimpo, World Bank

Abstract:

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 tax payers and the tax authority. We ran a randomized controlled trial with 424 firms in Lomé, 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.