Greener on the Other Side: Inequity and Tax Compliance
Governments frequently use observable tags as imperfect proxies to measure tax bases or household means, leading to inequities among equally-deserving individuals. This paper studies the efficiency effects of such misclassification in the context of the property tax in Manaus, Brazil. We leverage quasi-experimental variation in inequity generated by the boundaries of geographic sectors used to compute tax liabilities, as well as by a tax reform, in a series of augmented boundary discontinuity designs. Inequity significantly reduces tax compliance. The effect is concentrated among the overtaxed, and accounts for roughly 40% of the compliance change at sector boundaries. Combining our empirical results with a simple model of presumptive property taxation shows that optimal progressivity can be considerably lower once we account for inequity responses, and that investments in improving fiscal capacity to accurately assess properties can bolster progressivity.
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Copy CitationMichael C. Best, Luigi Caloi, François Gerard, Evan Plous Kresch, Joana Naritomi, and Laura Zoratto, "Greener on the Other Side: Inequity and Tax Compliance," NBER Working Paper 34062 (2025), https://doi.org/10.3386/w34062.Download Citation
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