Working Paper | HBS Working Paper Series | 2013

No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax

by Dina Pomeranz

Abstract

Claims that the VAT facilitates tax enforcement by generating paper trails on transactions 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 effect. 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.

Keywords: Information; Taxation; Chile;

Citation:

Pomeranz, Dina. "No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax." Harvard Business School Working Paper, No. 13-057, December 2012. (Revised April 2013. Under second review at the American Economic Review. Featured by CNN, Vox.eu, World Bank News, and others.)