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No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax

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  • Dina Pomeranz

Abstract

Tax evasion generates billions of dollars of losses in government revenue and creates large distortions, especially in developing countries. Claims that the VAT facilitates tax enforcement by generating paper trails on transactions between firms have contributed to widespread VAT adoption worldwide, but there is little empirical evidence about this mechanism. This paper analyzes the role of third party information for VAT enforcement through two randomized experiments among over 400,000 Chilean firms. Announcing additional monitoring has less impact on transactions that are subject to a paper trail, indicating the paper trail's preventive deterrence effect. Tax enforcement leads to strong spillovers up the VAT chain, increasing compliance by firms' suppliers. These findings confirm that when evasion is taken into account, significant differences emerge between otherwise equivalent forms of taxation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19199.

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Date of creation: Jul 2013
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Handle: RePEc:nbr:nberwo:19199

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  1. Gordon, Roger & Li, Wei, 2009. "Tax structures in developing countries: Many puzzles and a possible explanation," Journal of Public Economics, Elsevier, vol. 93(7-8), pages 855-866, August.
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Cited by:
  1. Erlend E. Bø & Joel Slemrod & Thor O. Thoresen, 2014. "Taxes on the internet. Deterrence effects of public disclosure," Discussion Papers 770, Research Department of Statistics Norway.

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