Dodging the Taxman: Firm Misreporting and Limits to Tax Enforcement

58 Pages Posted: 21 Oct 2014  

Dina Pomeranz

Harvard Business School

Paul E. Carrillo

George Washington University - Department of Economics

Monica Singhal

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: October 17, 2014

Abstract

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.

Suggested Citation

Pomeranz, Dina and Carrillo, Paul E. and Singhal, Monica, Dodging the Taxman: Firm Misreporting and Limits to Tax Enforcement (October 17, 2014). Harvard Business School Entrepreneurial Management Working Paper No. 15-026. Available at SSRN: https://ssrn.com/abstract=2512196 or http://dx.doi.org/10.2139/ssrn.2512196

Dina Pomeranz (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
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Paul E. Carrillo

George Washington University - Department of Economics ( email )

Monroe Hall Suite 340
2115 G Street NW
Washington, DC 20052
United States

Monica Singhal

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-496-5062 (Phone)
617-496-6372 (Fax)

HOME PAGE: http://ksgfaculty.harvard.edu/monica_singhal

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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