Dodging the Taxman: Firm Misreporting and Limits to Tax Enforcement

Paul E. Carrillo · Dina Pomeranz · Monica Singhal

95 citations0/0 files storedNational Bureau of Economic Research

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Taxation and Compliance Studies Economic and Fiscal Studies Corporate Taxation and Avoidance

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.

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References

1968Crime and Punishment: An Economic Approach 1991Multitask Principal–Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design 1972Income tax evasion: a theoretical analysis 1968Crime and Punishment: An Economic Approach 1993The O-Ring Theory of Economic Development 2011Unwilling or Unable to Cheat? Evidence From a Tax Audit Experiment in Denmark 2015No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax 2009Tax structures in developing countries: Many puzzles and a possible explanation

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