Dodging the Taxman

Reducing tax evasion is a priority for many governments. A growing literature argues that verifying taxpayer reports against third-party information is critical for tax collection. However, effectiveness can be limited when tax authorities face constraints to credible enforcement and taxpayers make offsetting adjustments on other margins. We exploit a policy intervention in which Ecuadorian firms were notified about detected revenue discrepancies. Most firms simply failed to respond. Firms that responded increased reported revenue, matching the discrepancy amount when provided. However, they also increased reported costs by 96 cents per dollar of revenue adjustment, resulting in minor increases in tax collection. JEL codes: H25, H26, O23, O38 ∗We thank Lorenzo Casaburi, Raj Chetty, John Friedman, Edward Glaeser, James Hines, Lawrence Katz, Asim Khwaja, Henrik Kleven, Michael Koelle, Wojciech Kopczuk, Michael Kremer, Ben Olken, Andrei Shleifer, Joel Slemrod, Johannes Spinnewijn and participants in numerous seminars and conferences for helpful comments and discussions. We thank Raul Duarte, Sajjad Goli, Andrea Lopez Luzuriaga, Parag Mahajan, Marco Martinez del Angel and Lucas Zavala for excellent research assistance. We are grateful to the staff of the Centro de Estudios Fiscales and the Departamento de Control of the Ecuadorian Tax Authority for outstanding collaboration and to the Harvard Weatherhead Center, Harvard Taubman Center and Harvard Business School for research support. †George Washington University, [email protected]. ‡Harvard University and NBER, [email protected]. §University of California, Davis and NBER, [email protected].