Using Divide-and-Conquer to Improve Tax Collection

Abstract Tax collection with limited enforcement capacity may be consistent with both high- and low-delinquency regimes: high delinquency reduces the effectiveness of threats, thereby reinforcing high delinquency. We explore the practical challenges of unraveling the high-delinquency equilibrium usi...

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Bibliographic Details
Published in:The Quarterly journal of economics 2024-10, Vol.139 (4), p.2475-2523
Main Authors: Kapon, Samuel, Del Carpio, Lucia, Chassang, Sylvain
Format: Article
Language:English
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Summary:Abstract Tax collection with limited enforcement capacity may be consistent with both high- and low-delinquency regimes: high delinquency reduces the effectiveness of threats, thereby reinforcing high delinquency. We explore the practical challenges of unraveling the high-delinquency equilibrium using a mechanism design insight known as divide-and-conquer. Our preferred mechanism takes the form of prioritized iterative enforcement (PIE). Taxpayers are ranked using the ratio of expected collection to capacity use. Collection threats are issued in small batches to ensure high credibility and induce high compliance. Following repayments, liberated capacity is used to issue the next round of threats. In collaboration with a district of Lima, we experimentally assess PIE in a sample of 13,432 property taxpayers. The data validate and refine our theoretical framework. A semi-structural model suggests that keeping collection actions fixed, PIE would increase tax revenue by roughly 10%.
ISSN:0033-5533
1531-4650
DOI:10.1093/qje/qjae018