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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title Dodging the taxman: firm misreporting and limits to tax enforcement
Organization Unit
  • Paul Carrillo
  • Dina Pomeranz
  • Monica Singhal
  • English
Institution Harvard Business School
Series Name HBS Working Paper Series
Number 15-026
Number of Pages 57
Date 2014
Abstract Text 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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Keywords Governance compliance, taxation, Ecuador