Tax Compliance and Private Sector Development in the Kyrgyz Republic

This randomized controlled trial will evaluate the impact of three different mechanisms aimed at improving regulatory transparency in business tax collection and reducing corruption in the Kyrgyz Republic.

The lack of regulatory transparency in business tax collection creates an incentive for firms to pay bribes to avoid tax, while reducing government tax revenue. The bribes also increase the firms’ implicit marginal tax rate, which has distortionary and negative impacts on the investment, productivity and growth of Micro and Small Enterprises (MSEs). These issues are particularly salient in Kyrgyzstan, where a recent World Bank study found that 54.8% of surveyed firms expected to give gifts or informal payments in meetings with tax officials.

In this context, the goal of this project is design, implement and evaluate various mechanisms to increase the bargaining power of MSEs in their relationship with tax officials, and/or change the sustainability of the collusive agreements between the two parties in order to improve business outcomes for MSEs and increase tax revenue. In collaboration with the World Bank and the State Tax Service (STS) of Kyrgyzstan, the researchers will design a randomized controlled trial (RCT) to evaluate the effectiveness of the following three instruments:

  1. Score cards where MSE owners rate the performance of tax officials and the latter are rewarded accordingly. This should increase the bargaining power of the MSE and reduce the amount of the bribe.
  2. Random double-audit where higher ranked tax officials double check the information and amount collected by tax officials during their visit for a randomly selected subset of cases. This should increase the cost of misreporting for both the firm and the tax official, which may lead to the break down of some bribing relationships.
  3. Gender-based matching procedures where women tax officials are assigned to female-owned MSEs.

The research team will randomly allocate each of the tax units Kyrgyzstan to either one of the three treatments or to a control group, and then compare the business outcomes, corruption levels and tax revenue by conducting three follow-up surveys and using a database of business taxpayers from the STS.  

The project will provide experimental evidence on mechanisms aimed at improving tax collection transparency in developing countries. These mechanisms are expected to reduce tax corruption, foster MSE development and increase tax revenues and public goods provision – all of which are crucial issues in developing countries and especially fragile states where tax enforcement and transparency are weak.