Working Paper: CEPR ID: DP17716
Authors: Anne Brockmeyer; Marco Hernandez
Abstract: Withholding of taxes by employers and by firms' trading partners is common around the world, but absent in public finance theory. We demonstrate the surprising power of withholding as a tax collection instrument, studying a scheme in Costa Rica where credit-card companies withhold tax on card sales. Doubling the withholding rate increases sales tax remittance among treated firms by 32 percent and aggregate revenue by 8 percent, although the statutory tax rate and third-party reporting requirements remain unchanged. We identify the mechanisms driving this effect and show that the current withholding rate is below the welfare-maximizing rate.
Keywords: taxation
JEL Codes: H25; H26; H32; O23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| doubling of the withholding rate for sales tax among credit card companies (H26) | 32% increase in sales tax remittance among treated firms (H32) |
| doubling of the withholding rate for sales tax among credit card companies (H26) | increase in reported tax liability due to heightened perceptions of enforcement (H26) |
| doubling of the withholding rate for sales tax among credit card companies (H26) | default remittance mechanism where a significant portion of withheld tax is not reclaimed by firms (F24) |
| doubling of the withholding rate for sales tax among credit card companies (H26) | 8% increase in aggregate sales tax revenue (H71) |