Compliance spillovers across taxes: The role of penalties and detection

Abstract

When the tax authority increases the enforcement for one tax, what happens to the level of compliance in other taxes (spillover effect)? In this paper, we present a simple analytical model that shows that the sign of the spillover depends on how taxpayers update their beliefs about penalties and detection probabilities for one tax after observing the deterrence actions the tax agency takes for another tax. As a result, when spillovers are present, penalties and detection may not necessarily be interchangeable policy tools. We evaluate the sign of the spillover in the context of a randomized field experiment in a municipality in Argentina in a sample of about 700 taxpayers who are liable for both the property and gross-sales taxes. The evidence from the intervention indicates that the spillover from a message that increases the salience of penalties and enforcement for the property tax on the declaration in the gross-sales tax is positive. Those in the treatment group increase their reported tax by two percentage points more than the control group. This result has ample implications for researchers bringing interventions to the field and for governments’ enforcement strategies.

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