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Tax audits as scarecrows. Evidence from a large-scale field experiment

Author

Listed:
  • Marcelo Bérgolo

    () (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economí­a)

  • Rodrigo Ceni

    () (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economí­a)

  • Guillermo Cruces

    () (Universidad Nacional de La Plata (Argentina). Facultad de Ciencias Económicas. Centro de Estudios Distributivos, Laborales y Sociales.)

  • Matías Giaccobasso

    () (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economí­a)

  • Ricardo Pérez-Truglia

    () (Universidad de California en Los Angeles (EEUU))

Abstract

The canonical model of Allingham and Sandmo (1972) predicts that firms evade taxes by optimally trading off between the costs and benefits of evasion. However, there is no direct evidence that firms react to audits in this way. We conducted a large-scale field experiment in collaboration with Uruguay’s tax authority to address this question. We sent letters to 20,440 small- and medium-sized firms that collectively paid more than 200 million dollars in taxes per year. Our letters provided exogenous yet nondeceptive signals about key inputs for their evasion decisions, such as audit probabilities and penalty rates. We measured the effect of these signals on their subsequent perceptions about the auditing process, based on survey data, as well as on the actual taxes paid, based on administrative data. We find that providing information about audits had a significant effect on tax compliance but in a manner that was inconsistent with Allingham and Sandmo (1972). Our findings are consistent with an alternative model, risk-as-feelings, in which messages about audits generate fear and induce probability neglect. According to this model, audits may deter tax evasion in the same way that scarecrows frighten off birds.

Suggested Citation

  • Marcelo Bérgolo & Rodrigo Ceni & Guillermo Cruces & Matías Giaccobasso & Ricardo Pérez-Truglia, 2019. "Tax audits as scarecrows. Evidence from a large-scale field experiment," Documentos de Trabajo (working papers) 19-12, Instituto de Economia - IECON.
  • Handle: RePEc:ulr:wpaper:dt-12-19
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    References listed on IDEAS

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    Cited by:

    1. Pomeranz, Dina D. & Vila-Belda, José, 2019. "Taking State-Capacity Research to the Field: Insights from Collaborations with Tax Authorities," CEPR Discussion Papers 13688, C.E.P.R. Discussion Papers.
    2. Philipp Doerrenberg & Andreas Peichl, 2017. "Tax morale and the role of social norms and reciprocity - Evidence from a randomized survey experiment," ifo Working Paper Series 242, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.

    More about this item

    Keywords

    tax; evasion; audits; penalties; frictions;

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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