Discussion paper

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

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.


Singhal, M, D Pomeranz and P Carrillo (2015), ‘DP10603 Dodging the Taxman: Firm Misreporting and Limits to Tax Enforcement‘, CEPR Discussion Paper No. 10603. CEPR Press, Paris & London. https://cepr.org/publications/dp10603