| Abstract: |
According to the canonical model of Allingham and Sandmo (1972), firms evade
taxes by making a trade-off between a lower tax burden and higher expected
penalties. However, there is still no consensus about whether real-world firms
operate in this rational way. We conducted a large-scale field experiment,
sending letters to over 20,000 firms that collectively pay over 200 million
dollars in taxes per year. In our letters, we provided firms with exogenous
but 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 do increase their tax compliance in response to information
about audits. However, the patterns in these responses are inconsistent with
utility maximization. The evidence suggests that, much like scarecrows
frighten off birds, audits can be a significant deterrent for tax evaders even
though they would be perceived as harmless by a rational optimizer. |