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Dodging the taxman: firm misreporting and limits to tax enforcement


Carrillo, Paul; Pomeranz, Dina; Singhal, Monica (2014). Dodging the taxman: firm misreporting and limits to tax enforcement. HBS Working Paper Series 15-026, Harvard Business School.

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.

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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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:H25, H26, O23, O38
Uncontrolled Keywords:Governance compliance; taxation; Ecuador
Language:English
Date:October 2014
Deposited On:31 May 2017 14:07
Last Modified:01 Jun 2017 03:09
Series Name:HBS Working Paper Series
Number of Pages:57
Free access at:Related URL. An embargo period may apply.
Related URLs:http://www.hbs.edu/faculty/Pages/item.aspx?num=48169

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