Working Paper: NBER ID: w23631
Authors: Marcelo L. Brgolo; Rodrigo Ceni; Guillermo Cruces; Matias Giaccobasso; Ricardo Perez-Truglia
Abstract: The canonical model of Allingham and Sandmo (1972) predicts that firms evade taxes by optimally trading off the costs and benefits of evasion. However, there is no direct evidence that firms react to audits in this way. We conducted a large-scale field experiment in collaboration with Uruguay’s tax authority to address this question. We sent letters to 20,440 small and medium-sized firms that collectively paid more than two hundred million U.S. dollars in taxes per year. Our letters provided exogenous yet nondeceptive signals on key inputs for their evasion decisions such as audit probabilities and penalty rates. Using survey data, we measured the effect of these signals on firms’ subsequent perceptions of the auditing process. Using administrative data, we measured their effect on actual taxes paid. We find that providing information on audits had a significant effect on tax compliance, but in a manner inconsistent with Allingham and Sandmo (1972). Our findings are consistent with an alternative model of risk-as-feeling, in which messages about audits generate fear and induce probability neglect. According to this model, audits may deter tax evasion in the same way scarecrows scare birds away.
Keywords: Tax Compliance; Field Experiment; Tax Audits; Behavioral Economics
JEL Codes: C93; H26; K42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| providing information on audits (M42) | tax compliance (H26) |
| audit statistics message (M42) | tax compliance (H26) |
| audit statistics message (M42) | perceived audit probability (M42) |
| tax compliance (H26) | perceived audit probability (M42) |
| audit statistics message (M42) | risk as feelings model (D91) |