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.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
15221.
Length: Date of creation: Aug 2009 Date of revision: Handle: RePEc:nbr:nberwo:15221
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Find related papers by JEL classification: H27 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other Sources of Revenue H41 - Public Economics - - Publicly Provided Goods - - - Public Goods O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
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