DP15215 Clearing the Bar: Improving Tax Compliance for Small Firms through Target Setting

Author(s):	Yazan Al-Karablieh, Evangelos Koumanakos, Stefanie Stantcheva
Publication Date:	August 2020
Keyword(s):	Amnesty, Corporate taxation, Tax avoidance, Tax compliance, taxation
JEL(s):	H20
Programme Areas:	Public Economics, International Trade and Regional Economics, International Macroeconomics and Finance
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=15215

We use a new dataset consisting of the universe of Greek corporate tax returns matched to financial statements to study a voluntary tax compliance program for small firms. This "self-assessment" program prescribed target taxable profit margins for different types of activity. Firms that reported profit margins above these targets in a given year were exempt from audits in that year. We find that the firms that take-up the program report significantly larger taxable profits than non-eligible firms, with some evidence of longer-lasting effects on tax reporting. Taxable profits increase by up to 70% of their pre-program levels. We also find that firms can easily and substantially manipulate reported revenue (decreasing it by up to 40%) to help meet prescribed profit margins. Overall, the program increased tax revenues collected from small firms, but points to a very large level of baseline under-reporting of profits and showcases the ease of manipulating reported revenues.