Taxation, Information, and Withholding: Evidence from Costa Rica

Brockmeyer, Anne; Hernandez, Marco

doi:10.1596/1813-9450-7600

Cited by 30 publications

(38 citation statements)

References 44 publications

(49 reference statements)

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…While most recent contributions in this literature have focused on misreporting on the intensive margin (Best et al 2015;Pomeranz 2015;Naritomi 2015, Carrillo, Pomeranz, and Singhal 2016), our study highlights the importance of compliance gaps on the extensive margin, and the cost-eectiveness of simple interventions to reduce these compliance gaps. In this sense, our study is a complement to Brockmeyer and Hernandez (2016) who conduct a systematic anatomy of compliance in Costa Rica, uncovering substantial compliance gaps on the extensive margin. The role of third-party information in enhancing tax compliance has featured prominently in the literature (Kleven et al 2011;Kleven, Kreiner, and Saez 2015).…”

Section: Policy Research Working Paper 7850mentioning

confidence: 92%

“…To shed light at this, we use rich administrative data on rm's ling of informative declarations, sales tax declarations, sales tax payment, deregistration, and switches to the simplied regime 29 , all of these representing compliance outcomes which were not directly targeted by the intervention. We also consider income tax compliance in 2013, which may be positively or negatively aected by the intervention (targeting non-lers for 2014), as a non-negligible share of rms le (or pay) their taxes with substantial delay (see Brockmeyer and Hernandez (2016) for details), and 80% of non-lers for 2014 were also non-lers in 2013. This is to our knowledge the rst study to examine the impact of enforcement on such a large variety of compliance measures.…”

Section: Other Compliance Outcomesmentioning

confidence: 99%

“…Firms selling manufactured goods and certain service businesses, such as hotels and restaurants, are also liable for the monthly sales tax. The sales tax is eectively a VAT, with a recrediting mechanism for taxed inputs, but has a relatively narrow base that excludes most services (see Brockmeyer and Hernandez (2016) for details). Approximately 20% of income tax-liable rms are liable for the sales tax.…”

mentioning

confidence: 99%

“…13 The corresponding gures in Brockmeyer and Hernandez (2016) are comparable, albeit lower, as they use an algorithm based on tax declarations and registration/deregistration records to construct snapshots of the tax register at dierent points in time, but do not directly observe the tax register. The gures in this paper are the authority's own estimates based on all available data.…”

mentioning

confidence: 99%

See 3 more Smart Citations

Casting the Tax Net Wider: Experimental Evidence from Costa Rica

Brockmeyer¹,

Hernandez²,

Kettle³

et al. 2016

Self Cite

View full text Add to dashboard Cite

All errors are our own.Developing countries struggle to raise sucient tax revenues to fund public services and anti-poverty programs. Indeed, low income countries have signicantly lower tax to GDP ratios than high income countries, despite similar tax rates for major taxes (Gordon and Li 2009;Besley and Persson 2013).A large part of the tax revenue gap can thus be explained by low compliance with statutory tax obligations, one key aspect of which is non-ling. In Costa Rica, about 25% of tax-registered rms, and over 60% of rms that are unregistered but known to the tax authority through third-party reports from other rms do not le their income tax declaration. The numbers are similar in Guatemala, where 28% of registered rms do not le, and across the Latin America region, where the average non-ling rate ranges from 20% to 30%. 1 Similar to other forms of non-compliance, nonling generates costs in terms of lost government revenue, horizontal inequity between taxpayers, and resource misallocation (Skinner and Slemrod 1985;Gordon and Li 2009). Yet, despite its empirical importance, non-ling has received little attention in the literature, which has focused on tax registration of fully informal rms 2 (e.g. De Andrade, Bruhn, and McKenzie 2014) and misreporting among tax lers (e.g. Carrillo, Pomeranz, and Singhal 2016), notably nding these compliance gaps dicult to address. 3 This paper argues that compliance at the tax ling margin can be enhanced with simple and highly cost-eective interventions. We evaluate a nation-wide randomized trial conducted by the tax authority of Costa Rica, in which 49,757 non-ling rms were requested by email to submit their income tax declaration for 2014. 4 To design the strongest possible message, the emails combined three features tested in previous communication interventions aimed at reducing misreporting or payment arrears. Specically, the emails contained strong deterrence content, integrated insights 1 Kettle et al. (2016) for Guatemala. In discussion with the authors, ocials from the Inter-American Center of Tax Administrations reported an average non-ling rate of 20-30% among tax registered rms in the region. A taxpayer is considered a non-ler if it does not le within two months of the ling deadline.2 For the purpose of this paper, rms that are not tax registered are considered fully informal. Firms that comply partially but not fully with their tax ling obligations (e.g. le income tax but not sales tax, or do not le regularly) are considered partially informal.3 Formalizing rms has proven challenging and costly, because the rms' (private) benet of formalization is often lower than the cost of formalization, especially for small rms (McKenzie and Sakho 2010; de Mel, McKenzie, and Woodru 2013; Bruhn and McKenzie 2013). Interventions to reduce misreporting have shown success for the valueadded tax (Pomeranz 2015; Naritomi 2015), but have been less successful for the income tax, where rms can shift evasion from the sales margin to the less veriable cost margin (Carrillo, Pomeranz, an...

show abstract

Section: Policy Research Working Paper 7850mentioning

confidence: 92%

Section: Other Compliance Outcomesmentioning

confidence: 99%

mentioning

confidence: 99%

mentioning

confidence: 99%

See 2 more Smart Citations

Casting the Tax Net Wider: Experimental Evidence from Costa Rica

Brockmeyer¹,

Hernandez²,

Kettle³

et al. 2016

Self Cite

View full text Add to dashboard Cite

show abstract

“…The empirical analysis of the effects of withholding has been a relatively neglected area in the literature. Using data from Costa Rica, Brockmeyer and Hernandez (2016) provide evidence that an increase in the withholding rate increases corporate tax revenue. In an interesting and careful analysis of withholding of personal income tax in Sweden, Engstrom et al (2015) develop a regression kink and discontinuity design to provide credible evidence that individual tax payers with a preliminary deficit (tax liability greater than withheld amount) use deductions to escape from the loss domain.…”

Section: Related Literaturementioning

confidence: 99%

Loss Aversion, Transaction Costs, or Audit Trigger? Learning About Corporate Tax Compliance from a Policy Experiment with Withholding Regime

Carrillo

Emran

2018

SSRN Journal

View full text Add to dashboard Cite

We analyze firm's tax choices facing a withholding and enforcement regime with a focus on three mechanisms of bunching: (i) transaction costs, (ii) withholding threshold as a reference point for taxpayer that creates a kink due to loss aversion, and (iii) withholding threshold as a reference point for audit (audit trigger model). The transaction costs model predicts that none of the firms that bunch at the withholding threshold would declare higher taxes when withholding rate is increased, as was the case in Ecuador in 2007. Evidence from a tripledifference research design shows higher tax payments by these firms. A prospect theoretic model with the power value function of Kahneman and Tversky (1979) does not generate bunching at the withholding threshold. While linear prospect theory (LPT) can generate bunching under certain conditions, it also yields testable predictions that are not consistent with the behavior of a significant proportion of firms. Under the LPT, given an enforcement and withholding regime, if a firm bunches in one year it should also bunch in all the following years, or if it unbunches in a following year, it should declare taxes less than the withheld amount. The evidence from panel data on the universe of all corporations in Ecuador shows very low persistence in bunching: conditional on bunching at least once, only 3-4 percent firms bunch every year before changes in the withholding rate, and among the firms that unbunch 35-40 percent declare taxes more than the withheld amount, thus contradicting the LPT model for a substantial proportion of the firms. Using the Sasabuchi t test as developed by Lind and Mehlum (2010), we find that the relation between probability of bunching and assets of a firm is inverted-U which is consistent with the audit trigger model. The evidence suggests that the behavior of the firms cannot be captured by a single model. The strength of enforcement is important in determining bunching in an LPT model which suggests cross-country differences in the role played by loss aversion in bunching of taxpayers at policy thresholds.

show abstract