Working Paper: CEPR ID: DP10603
Authors: Paul Carrillo; Dina Pomeranz; Monica Singhal
Abstract: Reducing tax evasion is a key priority for many governments, particularly in developing countries. A growing literature argues that cross-checks of taxpayer reports against third-party information are critical for effective tax enforcement. However, such cross-checks may have limited effectiveness if taxpayers can make offsetting adjustments on other margins. We present a simple framework demonstrating conditions under which this occurs and empirical evidence from a natural experiment in Ecuador. When firms are notified about detected revenue discrepancies, they increase reported revenues - but also reported costs (by 96 cents per dollar of revenue adjustment), resulting in minor increases in tax collection.
Keywords: Ecuador; Evasion; Tax
JEL Codes: H25; H26; O23; O38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Notifications of revenue discrepancies (H26) | Adjustments in reported revenues (H29) |
| Notifications of revenue discrepancies (H26) | Adjustments in reported costs (M41) |
| Adjustments in reported revenues (H29) | Effect on tax collection (H26) |
| Notifications of revenue discrepancies (H26) | Matching third-party revenue amount (H27) |
| Failure to file requested amendment (Y20) | Limits to enforcement (P14) |