Working Paper: NBER ID: w19199
Authors: Dina Pomeranz
Abstract: Tax evasion generates billions of dollars of losses in government revenue and creates large distortions, especially in developing countries. Claims that the VAT facilitates tax enforcement by generating paper trails on transactions between firms have contributed to widespread VAT adoption worldwide, but there is little empirical evidence about this mechanism. This paper analyzes the role of third party information for VAT enforcement through two randomized experiments among over 400,000 Chilean firms. Announcing additional monitoring has less impact on transactions that are subject to a paper trail, indicating the paper trail's preventive deterrence effect. Tax enforcement leads to strong spillovers up the VAT chain, increasing compliance by firms' suppliers. These findings confirm that when evasion is taken into account, significant differences emerge between otherwise equivalent forms of taxation.
Keywords: Value Added Tax; Tax Enforcement; Tax Evasion; Third-Party Reporting
JEL Codes: H25; H26; O17; O23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| VAT paper trail (H25) | reduced tax evasion (H26) |
| audit probability + VAT paper trail (M42) | smaller increase in response to audit messages (M42) |
| increased audit probability for one firm (M42) | higher VAT payments from suppliers (H25) |
| VAT paper trail (H25) | enhances spillover effect (O36) |