Using Divide-and-Conquer to Improve Tax Collection

Samuel Kapon, Lucia Del Carpio and Sylvain Chassang
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Samuel Kapon: UC Berkeley
Lucia Del Carpio: INSEAD
Sylvain Chassang: Princeton University

Working Papers from Princeton University, Department of Economics, Center for Economic Policy Studies.

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 both validate and refine our theoretical framework. A semi-structural model suggests that keeping collection actions fixed, PIE would increase tax revenue by roughly 10%.

Keywords: Lima, Peru; prioritized iterative enforcement, divide-and-conquer, tax collection, limited government capacity (search for similar items in EconPapers)
JEL-codes: H20 (search for similar items in EconPapers)
Date: 2024-02
New Economics Papers: this item is included in nep-des, nep-iue, nep-mic and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:pri:cepsud:335

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