Incentives to Business Tax Inspectors: An RCT in the Kyrgyz Republic

Regulatory transparency is key in improving state capacity and foster economic development. In the case of tax collection activities, the lack of regulatory transparency negatively affects tax revenue mobilization efforts of governments (Besley and Persson 2014). It also dampens private sector development, as it increases the costs for private businesses of complying with tax legislation and dealing with the tax authority. Evidence suggests that these costs are disproportionally more relevant for Micro and Small Enterprises (MSEs) (IFC 2014). Given the structure of bureaucracy and the logistics of tax collection activities in developing countries, it is not uncommon for MSEs to reach informal agreements and engage in a bribing relationship with tax officials. The percentage of firms reporting to expect to give gifts or informal payments in meetings with tax officials ranges from 21.2% in Middle East and North Africa to 13.3% in Eastern Europe and Central Asia, as opposed to only 0.8% in OECD high income countries (World Bank 2015). Bribes may raise the marginal tax rate of firms, with a distortionary negative impact on investment, productivity and growth of MSEs (Olken and Pande 2012). This projects aims to improve the regulatory transparency of tax collection in the Kyrgyz Republic (KR). The KR stands out as one of the countries where the issues outlined above are particularly salient. According to World Bank (2015), 54.8% of surveyed firms expect to give gifts or informal payments in meetings with tax officials. The possibility of such informal arrangements is also recognized to be among the main factors which enable firms to decrease the taxable base, thus decreasing tax revenues for the government of the KR (IFC 2014).