Tax Audits as Scarecrows: Evidence from a Large-Scale Field Experiment
The canonical model of Allingham and Sandmo (1972) predicts that firms evade taxes by optimally trading off between the costs and the benefits of evasion. However, there is still no consensus about whether real-world firms react to audits in this way. We conducted a large scale field experiment in collaboration with Uruguay’s tax authority to shed light on these issues. We sent letters to 20,440 small- and medium-sized firms that collectively pay over 200 million dollars in taxes per year. Our letters provided exogenous yet nondeceptive signals about key inputs for their evasion decisions such as audit probabilities and penalty rates. We measure the effect of these signals on their subsequent perceptions about the auditing process, based on survey data, as well as on the actual taxes paid, according to administrative data. We find that firms increase their tax compliance in response to information about audits. However, we do not find these effects to be consistent with Allingham and Sandmo (1972). Our favorite interpretation of our findings is based on the model of risk-as-feelings: audits may deter tax evasion in the same way that scarecrows frighten off birds.
Document Object Identifier (DOI): 10.3386/w23631
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