Thursday, October 18, 2012
Dina D. Pomeranz (Harvard Business School) presents No Taxation Without Information: Deterrence and Self-Enforcement in the Value Added Tax at Columbia today as part of its Tax Policy Colloquium Series hosted by Alex Raskolnikov, David Schizer and Wojciech Kopczuk:
Tax evasion generates billions of dollars of losses in government revenue and creates large distortions, especially in developing countries. A growing, mostly theoretical literature argues that information flows are central to understanding effective taxation. This paper analyzes the role of information for tax enforcement in the case of the Value Added Tax (VAT) through two randomized field experiments with over 445,000 Chilean firms. Claims that the VAT facilitates tax enforcement by generating a paper trail on transactions between firms have led to widespread VAT adoption worldwide, but there is surprisingly little evidence. I find that the paper trail leads to spillovers that create important multiplier effects in tax enforcement. The impact of a random audit announcement is transmitted up the VAT chain, increasing compliance by firms' suppliers. A second experiment finds that the paper trail acts as a substitute to a firm's own audit risk. A message announcing increased tax enforcement has a much smaller effect on reporting of transactions that are already covered by a paper trail. These findings confirm that when evasion is taken into account, significant differences emerge between taxes that are equivalent in standard models but generate different information on taxable transactions.