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Informal Taxation

  • Olken, Benjamin A.

    (MIT)

  • Singhal, Monica

    (Harvard University)

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 Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp09-033.

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Date of creation: Oct 2009
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Handle: RePEc:ecl:harjfk:rwp09-033
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