DP10603 Dodging the Taxman: Firm Misreporting and Limits to Tax Enforcement

Author(s): Paul Carrillo, Dina D. Pomeranz, Monica Singhal
Publication Date: May 2015
Keyword(s): Ecuador, evasion, tax
JEL(s): H25, H26, O23, O38
Programme Areas: Public Economics, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10603

Reducing tax evasion is a key priority for many governments, particularly in developing countries. A growing literature argues that cross-checks of taxpayer reports against third-party information are critical for effective tax enforcement. However, such cross-checks may have limited effectiveness if taxpayers can make offsetting adjustments on other margins. We present a simple framework demonstrating conditions under which this occurs and empirical evidence from a natural experiment in Ecuador. When firms are notified about detected revenue discrepancies, they increase reported revenues - but also reported costs (by 96 cents per dollar of revenue adjustment), resulting in minor increases in tax collection.