Taxation, Information and Withholding: Evidence from Costa Rica

Anne Brockmeyer and Marco Hernandez

No 17716, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Withholding of taxes by employers and by firms' trading partners is common around the world, but absent in public finance theory. We demonstrate the surprising power of withholding as a tax collection instrument, studying a scheme in Costa Rica where credit-card companies withhold tax on card sales. Doubling the withholding rate increases sales tax remittance among treated firms by 32 percent and aggregate revenue by 8 percent, although the statutory tax rate and third-party reporting requirements remain unchanged. We identify the mechanisms driving this effect and show that the current withholding rate is below the welfare-maximizing rate.

Keywords: Taxation (search for similar items in EconPapers)
JEL-codes: H25 H26 H32 O23 (search for similar items in EconPapers)
Date: 2022-11
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