Principal Investigators: Adrienne LeBas, Jessica Gottlieb, Nonso Obikili
Country: Nigeria



Dates of Intervention: November 2017 - September 2018

Background: Across much of Africa, the informal sector accounts for up to eighty percent of the labor force and a similar share of overall economic activity, but this sector remains largely outside the regulatory and tax reach of states. State appeals can shift formalization and tax compliance, especially if appeals shift the perceived costs and benefits of formalization and compliance. The understanding of the conditions under which these appeals are effective, however, remains incomplete. Since 2006, Lagos State Government in Nigeria has launched a number of initiatives to increase the registration of taxpayers and the payment of income tax. These initiatives have been successful, generating a more than 400 percent increase in tax revenue over this period, and they have been accompanied by a significant expansion of state services delivery, even in the poorest areas of Lagos. The majority of the informal sector, however, remains outside the state tax net. To this point, tax enforcement efforts in the informal sector have been minimal. Furthermore, most current income tax contributions by small businesses and vendors has occurred through indirect payment to the trade and marketplace associations to which many members of the informal sector belong. The aim of this study is to assess how the informational content and framing of formalization and tax appeals shape behavioral and attitudinal response.

Research Design: Our study proposes two interventions aimed at increasing formalization and tax payment by informal sector vendors located in Lagos marketplaces, the bulk of whom are operating small businesses with fewer than five employees. The two interventions generate six separate conditions, and treatment is assigned at the individual level. Vendors’ knowledge of the tax registration process, benefits attached to registration, and their own potential income tax liability is low. The first intervention therefore examines how provision of information and registration assistance by a local NGO affects formalization. The second intervention then examines how the effectiveness of tax payment appeals varies based on the framing of those appeals and the identity of the agent delivering the appeal. One of the significant features of this research site is the importance of pre-existing institutions that already play a role in mediating the relationship between informal sector workers and the state. Thus, in the second intervention, an individual vendor will receive a visit that stresses either the potential costs of non-compliance (punishment) or the potential benefits of tax payment (more public goods), but we also vary the identity of the agent delivering these appeals. Individuals will be randomly assigned to delivery by staff of Lagos Internal Revenue or by representatives of the vendors’ marketplace association.

Hypotheses:
  • H1: The provision of information about tax registration’s potential costs (assessment of individual tax liability) and benefits (access to subsidized loans, registration in government secondary schools) will increase formalization. To ensure that other informational or knowledge constraints do not dampen the effect of this intervention, we will provide maps to the nearest mini tax stations where registration can be filed, and we will offer follow-up visits during which vendors can be registered on the LIRS online platform on-the-spot.
  • H2: Formalization is likely to have modest effects on tax payment in the absence of additional tax appeals.
  • H3: We expect the second tax appeal intervention to increase individuals’ tax registration and payment, as well as attitudinal measures such as tax morale, though the size of these effects may vary across treatment arms.
  • H4: We hypothesize that tax appeals framed around public goods will be more effective when delivered by LIRS, while tax appeals stressing enforcement and penalization will be more effective when delivered by marketplace associations. This is because marketplace associations are present in these marketplaces, have greater capacity to locate and sanction non-compliant vendors, and also possess greater knowledge of vendors’ business operations and ability to pay.
  • H5: Several individual-level characteristics should shape response to both the formalization intervention and the tax appeal intervention. These include: the size, location, and character of the vendor’s business, which will affect both the benefits that accrue from formalization and the likelihood of enforcement; the minority status of the vendor, which will dampen positive response; and the vendor’s past experience of public services and/or demand for such services.
  • H6: The tax appeal intervention will boost political participation, especially among those who receive visits from a state agent. We expect this is the case because individuals will update either about the likelihood of tax enforcement and therefore will feel more invested in the quality of government and oversight of tax revenues, to which they now expect they will need to contribute.