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Informal Taxation

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  • Singhal, Monica
  • Olken, Benjamin A.

Abstract

Informal payments are a frequently overlooked source of local public finance in developing countries. We use microdata from ten countries to establish stylized facts on the magnitude, form, and distributional implications of this "informal taxation." Informal taxation is widespread, particularly in rural areas, with substantial in-kind labor payments. The wealthy pay more, but pay less in percentage terms, and informal taxes are more regressive than formal taxes. Failing to include informal taxation underestimates household tax burdens and revenue decentralization in developing countries. We propose a simple model of information and enforcement constraints that parsimoniously explains the patterns in the data.

Suggested Citation

  • Singhal, Monica & Olken, Benjamin A., 2009. "Informal Taxation," Scholarly Articles 4449108, Harvard Kennedy School of Government.
    • Handle: RePEc:hrv:hksfac:4449108
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    Cited by:

    1. Benjamin A. Olken & Monica Singhal, 2011. "Informal Taxation," American Economic Journal: Applied Economics, American Economic Association, vol. 3(4), pages 1-28, October.
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    4. Niehaus, Paul & Sukhtankar, Sandip, 2013. "The marginal rate of corruption in public programs: Evidence from India," Journal of Public Economics, Elsevier, vol. 104(C), pages 52-64.
    5. Gerard Padro i Miquel & Nancy Qian & Yang Yao, 2012. "Social Fragmentation, Public Goods and Elections: Evidence from China," NBER Working Papers 18633, National Bureau of Economic Research, Inc.
    6. Martinsson, Peter & Medhin, Haileselassie & Persson, Emil, 2016. "Framing and Minimum Levels in Public Good Provision," Working Papers in Economics 656, University of Gothenburg, Department of Economics.
    7. Denis Cogneau & Yannick Dupraz & Justine Knebelmann & Sandrine Mesplé-Somps, 2021. "Taxation in Africa from Colonial Times to Present Evidence from former French colonies 1900-2018," PSE Working Papers halshs-03420664, HAL.
    8. Gadenne, Lucie, 2018. "Do Ration Shop Systems Increase Welfare? Theory and an Application to India," CAGE Online Working Paper Series 358, Competitive Advantage in the Global Economy (CAGE).
    9. Bachas, Pierre & Fattal Jaef, Roberto N. & Jensen, Anders, 2019. "Size-dependent tax enforcement and compliance: Global evidence and aggregate implications," Journal of Development Economics, Elsevier, vol. 140(C), pages 203-222.
    10. Lucie Gadenne, 2020. "Can Rationing Increase Welfare? Theory and an Application to India's Ration Shop System," American Economic Journal: Economic Policy, American Economic Association, vol. 12(4), pages 144-177, November.
    11. Koen P.R. Bartels & Guido Cozzi & Noemi Mantovan, 2011. "Public Spending and Volunteering: "The Big Society", Crowding Out, and Volunteering Capital," Working Papers 2011_09, Durham University Business School.
    12. Levy, Gilat & Bandiera, Oriana, 2010. "Diversity and the Power of the Elites in Democratic Societies: A model and a test," CEPR Discussion Papers 7985, C.E.P.R. Discussion Papers.
    13. Archambault, Caroline & Chemin, Matthieu & de Laat, Joost, 2016. "Can peers increase the voluntary contributions in community driven projects? Evidence from a field experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 132(PA), pages 62-77.
    14. Liu, Yu, 2018. "Government extraction and firm size: Local officials’ responses to fiscal distress in China," Journal of Comparative Economics, Elsevier, vol. 46(4), pages 1310-1331.
    15. Di Falco, Salvatore & Feri, Francesco & Pin, Paolo & Vollenweider, Xavier, 2018. "Ties that bind: Network redistributive pressure and economic decisions in village economies," Journal of Development Economics, Elsevier, vol. 131(C), pages 123-131.
    16. Haichao Fan & Yu Liu & Nancy Qian & Jaya Wen, 2018. "Computerizing VAT Invoices in China," NBER Working Papers 24414, National Bureau of Economic Research, Inc.
    17. Hungerman, Daniel M., 2014. "Public goods, hidden income, and tax evasion: Some nonstandard results from the warm-glow model," Journal of Development Economics, Elsevier, vol. 109(C), pages 188-202.
    18. Jack, B. Kelsey & Recalde, María P., 2015. "Leadership and the voluntary provision of public goods: Field evidence from Bolivia," Journal of Public Economics, Elsevier, vol. 122(C), pages 80-93.
    19. Qian, Nancy & Liu, Yu & Wen, Jaya & Fan, Haichao, 2018. "The Dynamic Effects of Computerized VAT Invoices on Chinese Manufacturing Firms," CEPR Discussion Papers 12786, C.E.P.R. Discussion Papers.
    20. Ivanyna, Maksym & von Haldenwang, Christian, 2012. "A comparative view on the tax performance of developing countries: Regional patterns, non-tax revenue and governance," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 6, pages 1-44.
    21. Xia, Xing, 2021. "Barrier to Entry or Signal of Quality? The Effects of Occupational Licensing on Minority Dental Assistants," Labour Economics, Elsevier, vol. 71(C).
    22. Bandiera, Oriana & Levy, Gilat, 2011. "Diversity and the power of the elites in democratic societies: Evidence from Indonesia," Journal of Public Economics, Elsevier, vol. 95(11), pages 1322-1330.
    23. Casey B. Mulligan, 2015. "In-Kind Taxes, Behavior, and Comparative Advantage," NBER Working Papers 21586, National Bureau of Economic Research, Inc.

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    JEL classification:

    • H27 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other Sources of Revenue
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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