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Informal Taxation
Benjamin A Olken1, Monica Singhal
1MIT and NBER.
American Economic Journal. Applied Economics
|December 27, 2011
Summary
Informal taxation, including in-kind payments, is common in developing nations. This overlooked public finance source is regressive, meaning lower-income households bear a heavier burden than wealthier ones.
Area of Science:
- Economics
- Public Finance
- Development Studies
Background:
- Informal payments represent a significant, yet often ignored, component of local public finance in developing countries.
- Understanding informal taxation is crucial for accurate assessments of household financial burdens and government revenue.
Purpose of the Study:
- To analyze the scale, forms, and distributional effects of informal taxation using microdata from ten developing countries.
- To highlight the underestimation of household tax burdens and revenue decentralization when informal taxes are excluded.
Main Methods:
- Utilized microdata from ten developing countries to establish empirical patterns.
- Analyzed the magnitude, forms (including in-kind labor payments), and distributional implications of informal taxation.
Main Results:
- Informal taxation is prevalent, especially in rural areas, with significant in-kind labor contributions.
- While the wealthy pay more in absolute terms, informal taxes are more regressive than formal taxes.
- Excluding informal taxation leads to an underestimation of both household tax burdens and revenue decentralization.
Conclusions:
- Informal taxation is a substantial and widespread fiscal phenomenon in developing countries.
- The regressive nature of informal taxes disproportionately affects lower-income populations.
- Accurate policy and economic analysis require the inclusion of informal taxation in public finance assessments.
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