Taxing Property in Developing Countries: Theory and Evidence from Mexico
Property taxes in developing countries are plagued by noncompliance and can exacerbate liquidity constraints. We characterize optimal enforcement and taxation policies as functions of revenue elasticities and measures of taxpayer hardship. We estimate these parameters using multiple sources of variation and administrative data from Mexico City. Both rate increases and enhanced enforcement raise revenue, but liquidity constraints also shape taxpayer behavior. Despite the presence of liquidity constraints, we find that raising tax rates increases welfare. In contrast, enforcement generates higher private costs than welfare benefits. On the margin, welfare-maximizing governments would prefer to increase tax rates rather than enhance enforcement.
The project was funded by the World Bank. Brockmeyer's time was partly funded by UKAID from the UK government through an Accountable Grant Agreement for the Centre for Tax Analysis in Developing Countries (TaxDev) at the Institute for Fiscal Studies (IFS). The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank, its Board of Executive Directors, or the governments that they represent, nor do they reflect the views of the Ministry of Finance of Mexico City or the Federal Ministry of Finance in Mexico, nor those of the National Bureau of Economic Research.