Formalization, Tax Appeals, and Social Intermediaries in Lagos, Nigeria

• In Event: Formalizing the Relationship between Citizen and State: Experiments from Africa

Abstract

One of the foremost challenges to state-building in weak states is the collection of sufficient revenue for the government to supply public goods. While tax rates in such states may resemble those in more developed countries, most citizens pay taxes informally, unsystematically, or not at all. If weak states seek to expand the size of their tax base and the overall revenue collected, under what conditions can improved information or other appeals boost pro-tax attitudes and formal tax compliance? Citizens often lack information about the processes and benefits of formal taxation, but we argue that providing information is unlikely to boost tax compliance if state efforts do not take account of pre-existing institutions that already play a role in mediating the relationship between informal sector workers and the state. To better understand the role of these social intermediaries in new attempts at formalization, we conduct a field experiment in Lagos, Nigeria. The target population of market vendors, who are part of Lagos’s large informal sector, receive a standard informational intervention delivered by a local NGO, and we then vary vendor exposure to additional tax appeals. Some of these appeals are delivered by an existing social intermediary that market vendors already know, while others receive a visit from a representative of the state’s IRS, with whom many vendors have not had any contact. Additionally, we vary whether these agents stress the costs (enforcement potential) or benefits (public goods provision) of formally registering with and paying income taxes to the state government. We use both survey and administrative data to study effects of registration and tax compliance. Panel survey data further allows us to observe changes in attitudes about taxation and the state to better understand mechanisms, while survey responses about civic and political participation allow us to identify secondary effects of formalization by using random assignment to treatment as an instrument.

Authors

• Adrienne LeBas, American University

• Jessica Gottlieb, Texas A&M University

• Janica Magat, Texas A&M University

• Nonso Yves Obikili, Economic Research Southern Africa