Greater-than-expected use of so-called informal taxation in developing countries supports public works but adds a burden for the poor, a U.S. study says.
Researchers at the Massachusetts Institute of Technology say developing countries often lack a government structure that can collect taxes efficiently, limiting their ability to provide public services that aid growth, such as roads, sanitation and access to water. The study, co-authored by MIT economist Benjamin Olken, shows that developing countries have extensive informal systems in which citizens contribute money and labor to public-works projects, an MIT release said Wednesday.
Though not always considered as taxes, it's basically the same thing, economists said.
"Asking people to contribute labor to road projects, or to contribute money to replacing the roof on a school building, is a real tax, but it doesn't show up in most statistics," Erzo Luttmer, an professor of economics at Dartmouth College, said.
"Nobody had inquired as thoroughly into it until now," he said of Olken's study.
Olken said his research found the practice to be widespread.
"It's really surprising just how many people are doing this, and how prevalent this is," Olken said. "This is a very common facet of how people experience life in a lot of developing countries. It's supporting a large share of what's going on at the village level."
However, these informal taxes are generally regressive, he said.
While better-off citizens contribute more than the poor do in absolute terms, the percentage of income they pay is lower than that paid by the poor.
Because organizations such as World Bank sometimes recommend that governments use local co-financing of public-works projects, that means some programs intended to help curb poverty may actually place a larger relative tax burden on the poor, Olken said.
"For aid groups, it's useful to know what the distributional implications will be, and compare that to other financing mechanisms," Olken said. "I hope that people will start thinking about these implications."
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