Motivating bureaucrats: Historical evidence on the impact of monetary incentives for tax inspectors

About this event

Reducing tax evasion is a key priority for many governments, particularly in developing countries. A growing literature has focused on the availability of third-party information as a critical factor to improve tax enforcement. However, there may be limits to the effectiveness of third-party information alone in improving revenue collection, particularly if other elements of enforcement are weakly enforced. Although the importance of an effective bureaucracy has been noted, its role in preventing tax evasion is less known. This project proposes to study the impact of monetary incentives to tax inspectors on tax evasion, using the hiring of “tax ferrets” in the United States from the end of the 19thcentury. These tax inspectors were charged with discovering omitted liabilities in property tax, and were paid a commission proportional to the tax revenue they generated. The identification strategy exploits variation in treatment timing due to uncertainty about the approval of these appointments by the state legislature. Preliminary results suggest that these programs were effective in raising tax revenue.