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Presumptive Taxation, Liquidity Constraints, and Tax Compliance: Experimental Evidence from Kenya

Feb 2015 to Jun 2017

Researcher(s)

Sponsor(s)

Stanford Economic Development Research Initiative (SEDRI)

Introduction:


A government’s ability to enforce tax collection efficiently is one of the fundamental components of state capacity and, in turn, of economic development. Tax evasion generates significant losses in government revenues and distortions in the economic activity. Evasion is of particular concern in developing countries, where the share of the informal economy is typically larger and the government has limited sources of information.

Over the last decade, an increasing number of revenue authorities around the world have started collaborating with academic researchers to rigorously evaluate initiatives aimed at increasing tax revenues. The current proposal arises from collaboration between the researchers and the Kenya Revenue Authority (KRA), one of the most innovative and respected tax authorities in Sub-Saharan Africa.

The partners have identified two major areas for joint projects: taxation of real estate rental income and value added tax (VAT) compliance for small firms. In the proposal, we describe two projects that aim at exploiting opportunities to raise tax revenues based on the availability of third party data and on insights from economic theory. Access to the KRA administrative data will reduce the need for survey data collection (at least in this first stage), thus making the research extremely cost-effective.

Real estate taxation and VAT compliance are topics whose interest spans well beyond the specific study setting. As such, we believe that the study findings will be relevant for tax authorities throughout the developing world. In addition, the strong partnership with KRA ensures that, should any of the proposed interventions be particularly effective in raising tax revenues, there would be high potential to scale them up nationwide.