Working Paper: NBER ID: w20624
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 has argued that the ability to verify taxpayer self-reports against reports from third parties is critical for modern tax enforcement and the growth of state capacity. However, there may be limits to the effectiveness of third-party information if taxpayers can make offsetting adjustments on less verifiable margins. We present a simple framework to demonstrate the conditions under which this will occur and provide strong empirical evidence for such behavior by exploiting a natural experiment in Ecuador. We find that when firms are notified by the tax authority about detected revenue discrepancies on previously filed corporate income tax returns, they increase reported revenues, matching the third-party estimate when provided. Firms also increase reported costs by 96 cents for every dollar of revenue adjustment, resulting in minor increases in total tax collection.
Keywords: Tax evasion; Third-party reporting; Tax compliance; Developing countries
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 |
|---|---|
| Notification about revenue discrepancies (H26) | Increase in reported revenues (O39) |
| Increase in reported revenues (O39) | Increase in reported costs (C82) |
| Notification about revenue discrepancies (H26) | Increase in tax liabilities (H22) |
| Increase in reported revenues (O39) | Limited overall effect on tax collection (H26) |
| Notification about revenue discrepancies (H26) | Deliberate misreporting (C83) |