Randomized Tax Enforcement Messages

Increasing tax revenue and reducing tax evasion is a key challenge for tax administrations around the world, particularly in developing countries. This paper presents a methodology to generate information to optimize audit strategies. Randomly selected taxpayers are presented with a deterrence message, and their subsequent tax payments are compared to a control group. This allows estimating what types of taxpayers are more likely to react to an increase in the perceived probability of being audited. Tax authorities can use this information to target audit activities towards categories of taxpayers that respond particularly strongly. They can also construct risk indicators that predict the likelihood of responding based on taxpayer characteristics. We present results from an application of this methodology among 445,000 firms in Chile, as well as the lessons learned during the implementation. ∗This project would not have been possible without the generous support of the following institutions: The Research and Studies Directorate at the Internal Revenue Service of Chile, the Center for International Development at the Harvard Kennedy School, the David Rockefeller Center for Latin American Studies, the Project on Justice Welfare and Economics at Harvard University and the Swiss Study Foundation. The authors are available for general or specific enquires on how to perform a similar evaluation in different contexts. †Tierra Firme, Santiago, Chile; [email protected] ‡Harvard Business School. Boston, USA; [email protected].