Unwilling or Unable to Cheat? Evidence from a Randomized Tax Audit Experiment in Denmark

50 Pages Posted: 22 Feb 2010 Last revised: 6 Aug 2010

See all articles by Henrik Kleven

Henrik Kleven

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)

Martin Knudsen

affiliation not provided to SSRN

Claus Thustrup Kreiner

University of Copenhagen - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Søren Lønstrup Pedersen

affiliation not provided to SSRN

Emmanuel Saez

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: February 2010

Abstract

This paper analyzes a randomized tax enforcement experiment in Denmark. In the base year, a stratified and representative sample of over 40,000 individual income tax filers was selected for the experiment. Half of the tax filers were randomly selected to be thoroughly audited, while the rest were deliberately not audited. The following year, "threat-of-audit" letters were randomly assigned and sent to tax filers in both groups. Using comprehensive administrative tax data, we present four main findings. First, we find that the tax evasion rate is very small (0.3%) for income subject to third-party reporting, but substantial (37%) for self-reported income. Since 95% of all income is third-party reported, the overall evasion rate is very modest. Second, using bunching evidence around large and salient kink points of the nonlinear income tax schedule, we find that marginal tax rates have a positive impact on tax evasion, but that this effect is small in comparison to avoidance responses. Third, we find that prior audits substantially increase self-reported income, implying that individuals update their beliefs about detection probability based on experiencing an audit. Fourth, threat-of-audit letters also have a significant effect on self-reported income, and the size of this effect depends positively on the audit probability expressed in the letter. All these empirical results can be explained by extending the standard model of (rational) tax evasion to allow for the key distinction between self-reported and third-party reported incomes.

Suggested Citation

Kleven, Henrik and Knudsen, Martin and Kreiner, Claus Thustrup and Pedersen, Søren Lønstrup and Saez, Emmanuel, Unwilling or Unable to Cheat? Evidence from a Randomized Tax Audit Experiment in Denmark (February 2010). NBER Working Paper No. w15769. Available at SSRN: https://ssrn.com/abstract=1556132

Henrik Kleven (Contact Author)

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Martin Knudsen

affiliation not provided to SSRN ( email )

No Address Available

Claus Thustrup Kreiner

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark
+45 35 32 30 20 (Phone)
+45 35 32 30 00 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Søren Lønstrup Pedersen

affiliation not provided to SSRN ( email )

Emmanuel Saez

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-642-4631 (Phone)
510-642-6615 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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