Boosting Tax Compliance: Evaluating Indonesia's Door-to-Door Enforcement Strategy

The study evaluates a door-to-door tax enforcement program in Gorontalo, Indonesia, which increased tax compliance by directly engaging property owners. The program showed higher effectiveness among lower-value properties, but could benefit from improved targeting strategies to maximize its impact.

A study by the World Bank focuses on a property tax enforcement initiative carried out in Gorontalo, Indonesia. The program was launched to improve tax compliance by sending tax officials directly to properties, where they engaged with owners about their tax obligations. This door-to-door campaign ran from November 2020 to December 2021, with a peak in January 2021 when over 8,000 visits were recorded. However, due to the impact of the COVID-19 pandemic, the number of visits slowed down in the following months. Despite the challenges, the program managed to reach 31,730 of the 52,941 registered properties in the city by the end of the campaign. This direct interaction aimed to improve compliance without imposing immediate penalties on non-compliant properties.

Boosting Compliance through Personal Engagement

The authors evaluated the effectiveness of this strategy using a combination of administrative data and machine-learning techniques. Their analysis revealed a notable increase in tax compliance, both in terms of getting more people to pay taxes (extensive margin) and increasing the amount paid by those who were already compliant (intensive margin). On the extensive margin, compliance rose by 4.3%, and on the intensive margin, it increased by 5.1% in the first year of the program. These effects were observed to persist into the following year. However, a critical observation was that the properties visited by tax officials were already more likely to comply with their tax obligations compared to those that were not visited. This raised concerns about the selection process, suggesting that the program might have been more effective had it targeted properties with a lower likelihood of compliance.

The Impact of Targeting Lower-Value Properties

One of the key findings was that higher-value properties appeared to be less responsive to the visits than lower-value ones. This suggests that the enforcement strategy could be improved by focusing on lower-value properties, which seem to benefit more from the direct engagement with tax authorities. This observation opens up discussions about the distributional consequences of such data-driven enforcement strategies. It raises the possibility that these types of interventions, if not carefully designed, could disproportionately target lower-income property owners, potentially leading to regressive outcomes.

Machine Learning Reveals Key Insights

Another important aspect of the study was the use of machine-learning techniques to analyze the program's heterogeneous effects. The researchers found that properties with lower land values and smaller areas were more responsive to the door-to-door visits. Properties that had been fined for non-compliance in previous years also showed a higher likelihood of becoming compliant after the visits, although the effectiveness of the visits decreased as the fines increased. This suggests that while visits were helpful in boosting compliance, the intervention's success depended heavily on the characteristics of the properties and their owners.

Long-Term Effects and Pandemic Impact

Despite these findings, the program's long-term effects are uncertain. Although the positive results continued into the second year, the authors speculate that the impact might have been underestimated in the first year due to the economic effects of the pandemic. They also suggest that in a typical, non-pandemic year, the program could have had an even greater impact. The study’s results highlight the need for more refined targeting strategies in similar tax enforcement programs. The observed increase in compliance was stronger among properties that had already demonstrated some level of compliance before the program began. If the tax authorities had focused their efforts on the properties that were less likely to comply, the overall effectiveness of the program could have been even greater.

A Call for Better Targeting in Future Programs

The authors estimate that if all properties had been visited, the program could have increased tax participation by as much as 7%, and tax compliance by around 6.4%. This suggests that a more targeted approach, focusing on non-compliant properties, could yield better results. Overall, the study provides valuable insights into the potential benefits of direct engagement strategies for improving tax compliance in developing countries like Indonesia. It also raises important questions about the equity and effectiveness of data-driven tax enforcement strategies, particularly when they are applied without penalties. While the door-to-door strategy demonstrated its value, particularly among lower-value properties, the results indicate that it could have been more effective if the targeting had been more precise. The authors advocate for further research into algorithm-based tax enforcement and policy learning, particularly to avoid regressive outcomes. The findings point to the potential of such programs to significantly improve tax compliance, even in the absence of penalties, and suggest that similar approaches could be beneficial in other developing countries.