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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.

Suggested Citation

  • Almunia, Miguel & Lopez-Rodriguez, David, 2012. "The efficiency cost of tax enforcement: evidence from a panel of spanish firms," MPRA Paper 44153, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:44153

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    References listed on IDEAS

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    Cited by:

    1. Thorben C. Kundt & Florian Misch & Birger Nerré, 2017. "Re-assessing the merits of measuring tax evasion through business surveys: an application of the crosswise model," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(1), pages 112-133, February.
    2. Laura Hospido & Eva Moreno-Galbis, 2015. "The Spanish productivity puzzle in the Great Recession," Working Papers 1501, Banco de España;Working Papers Homepage.
    3. FÈlix DomÌnguez Barrero & Julio LÛpez Laborda & Fernando Rodrigo Sauco, 2014. ""El hueco que deja el Diablo": Una estimaciÛn del fraude en el IRPF con microdatos tributarios," Studies on the Spanish Economy eee2014-01, FEDEA.
    4. Lorenzo Casaburi & Ugo Troiano, 2016. "Ghost-House Busters: The Electoral Response to a Large Anti–Tax Evasion Program," The Quarterly Journal of Economics, Oxford University Press, vol. 131(1), pages 273-314.
    5. Ricardo Perez-Truglia & Ugo Troiano, 2015. "Shaming Tax Delinquents," NBER Working Papers 21264, National Bureau of Economic Research, Inc.
    6. Sara Torregrosa, 2015. "Bypassing progressive taxation: fraud and base erosion in the Spanish income tax (1970-2001)," Working Papers 2015/31, Institut d'Economia de Barcelona (IEB).
    7. Anne Brockmeyer, 2013. "The investment effect of taxation: evidence from a corporate tax kink," Working Papers 1317, Oxford University Centre for Business Taxation.
    8. Julio López Laborda & Jorge Onrubia Fernández, 2014. "Cinco reflexiones sobre el Informe para la reforma del sistema tributario," Policy Papers 2014-01, FEDEA.

    More about this item


    corporate tax evasion; tax enforcement; efficient taxation;

    JEL classification:

    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance


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