Taxman's Dilemma: Coercion or Persuasion? Evidence from a Randomized Field Experiment in Ethiopia

Abstract

We analyze data from a randomized controlled trial of two innovative anti-tax evasion schemes in Ethiopia that signal threats of audit and complimentary messages that encourage tax morale. Our results indicate that the threat of audit reduces tax evasion significantly, and its effect is higher in businesses commonly suspected of high tax evasion rates. We also find that appealing to the tax morale promotes compliance but slightly less than that of audit threat. Our results are robust to different estimation strategies and less sensitive to potential confounding factors.

Compliance Behavior in Networks: Evidence from a Field Experiment

“…I nteracting with individuals and firms that are suspected of violating laws is an important challenge for many governmental agencies and regulators. Over the past decade, a significant body of research has experimentally tested numerous strategies to improve efficacy in such interactions (see, e.g., Kleven et al 2011;Dwenger et al 2016;Shimeles, Gurara, and Woldeyes 2017 on mailing campaigns to enforce taxes and other payments). While progress has been made in understanding what type of enforcement strategies work, it is less understood if and how such interventions generate spillovers on untreated actors within a given social or economic network (Rincke and Traxler 2011;Pomeranz 2015;Brollo, Kaufmann, and La Ferrara 2017).…”

Improving Tax Compliance Without Increasing Revenue: Evidence From Population-Wide Randomized Controlled Trials in Papua New Guinea

“…Letters that highlighted the risk of punishment and letters that referred to social norms were the most effective in increasing tax revenue. Shimeles et al (2017) show that hand-delivered letters, which refer to the risk of punishment or to public benefits from paying taxes, increased the amount of tax paid by enterprises in the capital city of Ethiopia, Addis Ababa, in the short run. They restrict their sample to taxpayers who were not exempt from paying tax and had never been contacted by the tax authority before.…”

“…Secondly, nudges are expected to be more effective at increasing the number of declarations filed by taxpayers who are exempt from paying tax (zero filers) as they only face transaction costs from complying compared to those who face both transaction and financial costs (non-zero filers). Previous studies in low-and lower-middle-income countries have been unable to test these predictions and how nudges effect different types of taxpayers in general as they have focused on comparing the effects of various messages on a narrow subset of taxpayers (Mascagni et al, 2017;Shimeles et al, 2017;Kettle et al, 2016). In addition, the results from existing research on tax compliance in upper-middle-and high-income countries may not translate into lower income settings characterized by low compliance rates, weak enforcement and where third party reporting is limited (Besley and Persson, 2014;Brockmeyer et al, 2019;Kleven et al, 2018;Pomeranz, 2015).…”

“…This also enables us to examine heterogeneity in the responsiveness of different types of taxpayers based on their history of compliance and their location, which helps enable us to isolate the channels driving the findings we observe. Existing research in these settings has been limited by only involving a sample of taxpayers in a capital city or a specific type of non-compliant taxpayers (Mascagni et al, 2017;Shimeles et al, 2017;Kettle et al, 2016). These studies focused on comparing the impact of different kinds of nudges as opposed to the impact of nudges on different types of taxpayers (Antinyan and Asatryan, 2019;Mascagni, 2018).…”

Testing the Effect of Tax Office and Taxpayer Interactions on the Integrity of Refund Claims

“…Hallsworth et al (2017), for instance, run an RCT with 200,000 taxpayers in the United Kingdom and find that informing 5 In Iyer et al (2010), two deterrence treatments show no significant effect but the authors conclude that the treatments are effective because they find a significant effect of the pooled treatments on tax compliance. 6 A related literature on tax compliance is emerging in low-and middle-income countries (see, for example, Castro & Scartascini, 2015;Pomeranz, 2015;Ortega & Scartascini, 2015;Khan et al, 2016;Del Carpio, 2013;Shimeles et al, 2017). The findings of these studies cannot be easily transferred to high-income countries like Australia because distrust in governmental structures and a low capacity of enforcing regulations are crucial drivers of non-compliance in these countries.…”