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Pomeranz, Dina Deborah

Tax evasion generates billions of dollars of losses in government revenue and creates large distortions, especially in developing countries. A growing, mostly theoretical literature argues that information flows are central to understanding effective taxation. This paper analyzes the role of information for tax enforcement in the case of the Value Added Tax (VAT) through two randomized field experiments with over 400 thousand Chilean firms. Claims that the VAT facilitates tax enforcement by generating a paper trail on transactions between firms have led to widespread VAT adoption worldwide, but there is surprisingly little evidence. I find that the paper trail acts as a substitute to a firm's own audit risk. A message announcing increased tax enforcement has a much smaller effect on reporting of transactions that are already covered by a paper trail. A second experiment shows that the paper trail leads to spillovers that create important multiplier effects in tax enforcement. The impact of a random audit announcement is transmitted up the VAT chain, increasing compliance by firms' suppliers. These findings confirm that when evasion is taken into account, significant differences emerge between taxes that are equivalent in standard models but generate different information on taxable transactions.

Reducing tax evasion is a key priority for many governments, particularly in developing countries. A growing literature has argued that the ability to verify taxpayer self-reports against reports from third parties is critical for modern tax enforcement and the growth of state capacity. However, there may be limits to the effectiveness of third-party information if taxpayers can make offsetting adjustments on less verifiable margins. We present a simple framework to demonstrate the conditions under which this will occur and provide strong empirical evidence for such behavior by exploiting a natural experiment in Ecuador. We find that when firms are notified by the tax authority about detected revenue discrepancies on previously filed corporate income tax returns, they increase reported revenues, matching the third-party estimate when provided. Firms also increase reported costs by 96 cents for every dollar of revenue adjustment, resulting in minor increases in total tax collection.

Poverty is often characterized not only by low and unstable income, but also by heavy debt burdens. We find that the inability to save contributes to this indebtedness. Access to free savings accounts substantially decreases participants' propensity to use short-term credit. In addition, participants who experience an economic shock have less need to reduce consumption, and subjective well-being improves significantly. Precautionary savings and credit therefore act as substitutes in providing self-insurance, and participants prefer saving more when given the choice. Take-up patterns suggest that requests by others for participants to share their resources are a key obstacle to saving.

We test the effectiveness of self-help peer groups as a commitment device for precautionary savings, through two randomized field experiments among 2,687 Chilean micro-entrepreneurs. The first experiment finds that self-help peer groups are a powerful tool to increase savings (the number of deposits grows 3.7-fold and the average savings balance almost doubles). In contrast, a more classical measure, a substantially increased interest rate, has no effect for most participants. A second experiment tests an alternative delivery mechanism and shows that effects of similar size can be achieved by holding people accountable through feedback text messages, without meetings or peer pressure.

Reducing tax evasion is a key challenge for governments around the world, particularly in developing countries. This paper presents a methodology to generate information to optimize audit strategies. Randomly selected taxpayers receive a deterrence message. Comparing their subsequent tax payments to a control group allows estimating what types of taxpayers are more likely to respond to an increase in perceived audit probability. This information can be used to target audits toward taxpayers that respond particularly strongly, and to construct risk indicators to predict taxpayers' responses. We show results from an application in Chile and describe lessons learned during the implementation.

Recent years have seen a large expansion in the use of rigorous impact evaluation techniques. Increasingly, public administrations are collaborating with academic economists and other quantitative social scientists to apply such rigorous methods to the study of public finance. These developments allow for more reliable measurements of the effects of different policy options on the behavioral responses of citizens, firm owners, or public officials. They can help decision makers in tax administrations, public procurement offices, and other public agencies design programs informed by well-founded evidence. This paper provides an introductory overview of the most frequently used impact evaluation methods. It is aimed at facilitating communication and collaboration between practitioners and academics by introducing key vocabulary and concepts used in rigorous impact evaluation methods, starting with randomized controlled trials and comparing them with other methods ranging from simple pre-post analysis to difference-in-differences, matching estimations, and regression discontinuity designs.