Public Finance: Enforcement
Brandon Williams
Development Economics
November 5, 2024
Public Finance: Enforcement
Development Economics
November 5, 2024
No Taxation Without Information (2015)
- In order to effectively tax transactions, the government needs to observe them
- Particularly difficult in developing countries
- Value Added Tax (VAT) offered a solution to imperfect observation
- Firms pay on difference between sales and input costs
- A "paper trail" is created because input costs include the sales from suppliers, generated through receipts
- A risk of cross-checks deters fraud reporting (and have opposite incentives for mis-reporting)
- No reason for this to hold once sold to the consumer
- Two experiments in Chile:
Public Finance: Enforcement
Development Economics
November 5, 2024
No Taxation Without Information (2015)
- Two experiments in Chile:
- Letter Message - letters that signal a higher possibility of audit
- Does not analyze the policy but rather the underlying behavioral mechanism
- If there is already a paper trail deterrence, we should see little change
- Letter Message - letters that signal a higher possibility of audit
Public Finance: Enforcement
Development Economics
November 5, 2024
No Taxation Without Information (2015)
Big jump indicates that there was scope to increase payments
Public Finance: Enforcement
Development Economics
November 5, 2024
No Taxation Without Information (2015)
Sales respond
Public Finance: Enforcement
Development Economics
November 5, 2024
No Taxation Without Information (2015)
Input costs do not -
paper trail deterrence
Sales respond
Public Finance: Enforcement
Development Economics
November 5, 2024
No Taxation Without Information (2015)
Sales respond
Input costs do not -
paper trail deterrence
Firm to firm sales see little change
Public Finance: Enforcement
Development Economics
November 5, 2024
No Taxation Without Information (2015)
Sales respond
Input costs do not -
paper trail deterrence
Firm to firm sales see little change
Concentrated in sales to consumers
Public Finance: Enforcement
Development Economics
November 5, 2024
No Taxation Without Information (2015)
- Two experiments in Chile:
- Letter Message - letters that signal a higher possibility of audit
- Does not analyze the policy but rather the underlying behavioral mechanism
- If there is already a paper trail deterrence, we should see little change
- Generates a strong increase in VAT
- Much more impactful for sales to consumers than to firms
- Spillover - announce that an audit is coming and look at both firms that were notified and those that weren't
- Can we find evidence of the self-enforcing mechanism?
- Letter Message - letters that signal a higher possibility of audit
Public Finance: Enforcement
Development Economics
November 5, 2024
No Taxation Without Information (2015)
Spillover effect increases payment
Public Finance: Enforcement
Development Economics
November 5, 2024
No Taxation Without Information (2015)
Spillover effect increases payment
Especially in suppliers
Public Finance: Enforcement
Development Economics
November 5, 2024
No Taxation Without Information (2015)
Spillover effect increases payment
Especially in suppliers
But not in clients - direction of the spillover up the chain
Public Finance: Enforcement
Development Economics
November 5, 2024
No Taxation Without Information (2015)
- Two experiments in Chile:
- Letter Message - letters that signal a higher possibility of audit
- Does not analyze the policy but rather the underlying behavioral mechanism
- If there is already a paper trail deterrence, we should see little change
- Generates a strong increase in VAT
- Much more impactful for sales to consumers than to firms
- Spillover - announce that an audit is coming and look at both firms that were notified and those that weren't
- Can we find evidence of the self-enforcing mechanism?
- Supplier firms increase their VAT payments
- Overall, VAT paper trail acts as substitute to own audit probability, and effectiveness is multiplied through spillover
- Letter Message - letters that signal a higher possibility of audit