How Pakistan improved tax compliance
The authors say that the increased compliance is driven by both fear of detection and punishment and the potential pride of being recognized as a top taxpayer
Tax evasion is a pervasive problem in developing countries, and especially in India.
The government has tried to address this in different ways but some measures such as demonetization have been criticized as both ineffective and extremely coercive . Experience from neighbouring Pakistan suggests that there might be more effective and less coercive ways of expanding the tax base.
In a new National Bureau for Economic Research study, Joel Slemrod and others show how two innovative Pakistani programmes improved tax compliance in the country. The first scheme, launched in 2012, entailed the Pakistan government to publicly disclose the amount of tax paid by all taxpayers including Members of Parliament (MPs).
At the same time, another programme was launched to reward the top 100 taxpayers across categories (corporations, partnerships, self-employed individuals, and wage-earners).
Rewards for being in the top 100 included several different benefits such as invitations to state dinners, fast-track immigration procedures and lounge access at airports.
The authors find that the two programmes increased tax compliance significantly—both for the number of taxpayers and the total tax paid. The effect is particularly large for MPs: tax compliance among them jumped to 100% in 2012 from 30% in 2011.
The authors argue that the increased compliance is driven by both fear of detection and punishment and the potential pride of being recognized as a top taxpayer.
From a policy perspective, the results show that public disclosure and social recognition of top taxpayers may be a cost-effective motivation for prompt tax payment. Moreover, this also serves as a lesson for other developing countries looking to improve tax compliance.