51 Pages Posted: 3 Jun 2017
Date Written: May 31, 2017
According to the workhorse model of Allingham and Sandmo (1972), firms evade taxes by optimally trading-off between the lower tax burden and the expected penalties from audits. However, there is still no consensus about whether firms react to audits and whether they react in a rational way. We conducted a large-scale field experiment with over 20,000 Uruguayan firms that collectively pay over $200 million dollars in taxes per year. We provided firms with exogenous but non-deceptive signals about the probability of being audited and the penalty rates for tax evasion. We measure the effect of this information on their subsequent perceptions about audits, measured with survey data, as well as on the actual taxes paid. We provide evidence that firm's reaction to audits is subject to substantial optimization and information frictions.
Keywords: tax, evasion, audits, penalties, frictions
JEL Classification: C93, H26, K34, K42, Z13
Suggested Citation: Suggested Citation
Bérgolo, Marcelo and Ceni, Rodrigo and Cruces, Guillermo and Giaccobasso, Matias and Perez-Truglia, Ricardo, Tax Audits as Scarecrows: Evidence from a Large-Scale Field Experiment (May 31, 2017). Available at SSRN: https://ssrn.com/abstract=2979096 or http://dx.doi.org/10.2139/ssrn.2979096