Do Indirect Taxes Promote Accountability? Testing The Effects of Revenue Modality on Citizen Behavior

Abstract:

Governments that rely on taxation, rather than non-earned revenues such as aid or oil, are believed to attain better outcomes across a range of governance measures. Yet this positive tax effect may fail to result from all forms of taxes. In particular, indirect taxes such as VAT or sales tax are less visible than direct taxes and, further, indirect taxes may not “bite” like direct taxes because individuals typically receive a valued good at the moment of paying them. Thus, the accountability gains from taxation may hold more strongly for direct than indirect taxes. Yet we lack compelling evidence regarding differential effects of tax mode and on the mechanisms through which different forms might operate. To fill this lacuna, we first report lab-in-the-field experiments, conducted in Uganda, showing that less visible indirect taxes have smaller effects on citizens’ accountability demands. We then describe survey experiments from Uganda demonstrating that indirect taxes are typically not visible to consumers when purchasing. Finally, cross-national data indicate that, while direct taxes are associated with lower corruption, indirect taxes are not.

Last updated on 12/03/2018