Harvard Study–No Taxation without Information

No Taxation without Information

Deterrence and Self-Enforcement in the Value Added Tax

Dina Pomeranz†

Harvard University and NBER October 2014

Abstract

Claims that the VAT facilitates tax enforcement by generating paper trails on trans- actions between firms contributed to widespread VAT adoption worldwide, but there is surprisingly little evidence. This paper analyzes the role of third party information for VAT enforcement through two randomized experiments among over 400,000 Chilean firms. Announcing additional monitoring has less impact on transactions that are subject to a paper trail, indicating the paper trail’s preventive deterrence elect. This leads to strong enforcement spillovers up the VAT chain. These findings confirm that when taking evasion into account, significant differences emerge between otherwise equivalent forms of taxation…