Positive vs. Negative Incentives for Compliance: Evaluating a Randomized Tax Holiday in Uruguay

Abstract

Developing states face enduring obstacles to generating tax revenue through sanctions for non-compliance. Can they boost compliance by instead offering positive inducements to citizens who pay their tax bills? We study the effects of a randomized lottery in Montevideo, Uruguay, in which the municipal government raffles tax holidays to good taxpayers who are current on past payments -- a type of lottery that is increasingly popular among municipal governments in the developing world. To compare the influence of negative incentives for tax compliance, such as fines and punishment for non-payment, with the positive inducement provided by the lottery, and to assess the program's incentive effects on delinquent taxpayers, we also use field and survey experiments in which we inform eligible and ineligible taxpayers about the rebate lottery, which has not been effectively advertised by the government. Taking advantage of access to over-time individual tax payment records as well as survey data, we find weak effects of the government's program on tax compliance, as well as citizens' attitudes towards taxation and governance. Our results underscore the structural difficulties of eliminating non-compliance through either negative or positive inducements.