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The efficiency cost of tax enforcement: evidence from a panel of spanish firms

  • Almunia, Miguel
  • Lopez-Rodriguez, David

In modern tax systems, firms remit the majority of tax revenues raised by the government, which gives them opportunities to avoid and evade taxes by misreporting their activities. In this paper, we use a natural policy experiment to analyze how firms respond to different tax enforcement regimes. The Spanish Large Taxpayers’ Unit (LTU) monitors and enforces the taxation of companies with operating revenue above €6 million, resulting in more frequent tax audits and more information requirements for those firms. We exploit this discontinuity in enforcement intensity to estimate the impact of low enforcement on tax reporting behavior, using a panel dataset of financial statements for 85% of Spanish firms in the period 1999-2007. We apply two different identification strategies. First, we find an excess mass of firms locating (“bunching”) just below the revenue threshold. Based on the number of bunching firms, we estimate that firms reduce reported revenue by 1.4% to 7.5% to avoid falling in the high enforcement regime. Second, we run panel regressions with firm fixed effects and find that reported input costs do not respond significantly to the change in tax enforcement. This suggests that firms react to the enforcement discontinuity mostly by reporting lower revenues, without significantly distorting production. The efficiency costs of tax enforcement are thus likely to be small because tax evasion constitutes a reallocation of income to tax-evading firms. A back-of-the-envelope calculation shows that the loss in tax revenue due to tax evasion by non-LTU firms is, however, significant. In light of these results, we discuss potential reforms to improve tax enforcement policies.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 44153.

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Date of creation: 2012
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Handle: RePEc:pra:mprapa:44153
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  1. Slemrod, Joel, 2004. "The Economics of Corporate Tax Selfishness," National Tax Journal, National Tax Association, vol. 57(4), pages 877-99, December.
  2. Friedrich Schneider & Andreas Buehn & Claudio E. Montenegro, 2010. "Shadow Economies All over the World: New Estimates for 162 Countries from 1999 to 2007," Working Papers wp322, University of Chile, Department of Economics.
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  7. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
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  9. Spencer Bastani & Håkan Selin, 2012. "Bunching and Non-Bunching at Kink Points of the Swedish Tax Schedule," CESifo Working Paper Series 3865, CESifo Group Munich.
  10. Dharmapala, Dhammika & Slemrod, Joel & Wilson, John Douglas, 2011. "Tax policy and the missing middle: Optimal tax remittance with firm-level administrative costs," Journal of Public Economics, Elsevier, vol. 95(9-10), pages 1036-1047, October.
  11. Dina Pomeranz, 2013. "No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax," NBER Working Papers 19199, National Bureau of Economic Research, Inc.
  12. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
  13. Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2009. "Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries," NBER Working Papers 15218, National Bureau of Economic Research, Inc.
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  15. �ureo de Paula & Jose A. Scheinkman, 2010. "Value-Added Taxes, Chain Effects, and Informality," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 195-221, October.
  16. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2009. "Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records," NBER Working Papers 15617, National Bureau of Economic Research, Inc.
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