Asymmetric Information and Tax Morale in Developing Countries

Abstract

Our paper investigates the implications of asymmetric non-tax revenue information for tax morale using micro data from thirty-six African countries. We build a model in which agents form their perceptions about the sufficiency of government non-tax revenue for development financing under asymmetric information conditions. We then construct a composite index of information access that generates predictions about these perceptions and tax morale at the household level. Two important predictions emerge; in the presence of asymmetric information, households overestimate the ability of non-tax revenues alone to finance development, which turn to have significant negative effects on household-level tax morale. Our findings which are robust across specifications and controls of cross-country fixed differences in tax morale, provides evidence that improvement in government information supply regarding the use of non-tax revenues — beyond annual budget readings and households tax obligations could significantly enhance tax morale and tax compliance.