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Harnessing Deductions to Increase Tax Compliance and Formalization

Author

Listed:
  • Albrecht Bohne
  • Jan Sebastian Nimczik

Abstract

We evaluate a tax reform in Ecuador that introduced generous deductions from personal income taxes (PIT), encouraging consumers to request receipts. The reform addresses tax evasion by targeting small self-employed businesses that mainly sell goods or services not subject to value-added taxes (VAT) but that often evade income taxes. Exploiting plausibly exogenous variation in receipt demand due to the distribution of taxpayers across regions and professions, we find significant increases in reported profits among self-employed businesses exposed to the reform. We document spillover effects on VAT. Our net-revenue impact analysis suggests the additional tax payments outweigh the foregone tax revenue.

Suggested Citation

  • Albrecht Bohne & Jan Sebastian Nimczik, 2026. "Harnessing Deductions to Increase Tax Compliance and Formalization," American Economic Journal: Economic Policy, American Economic Association, vol. 18(2), pages 141-180, May.
    • Handle: RePEc:aea:aejpol:v:18:y:2026:i:2:p:141-80
    DOI: 10.1257/pol.20230365
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    More about this item

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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