Heterogeneous responses to effective tax enforcement: evidence from Spanish firms

Miguel Almunia and David Lopez-Rodriguez ()

No 1419, Working Papers from Banco de España

Abstract: This paper investigates the effects of monitoring the information trails generated by firms’ activities in order to improve tax compliance. We use quasi-experimental variation provided by a Large Taxpayers Unit (LTU) in Spain to empirically test the theoretical predictions on firms’ responses to an increase in monitoring effort. Firms with more than €6 million in reported revenue are monitored by the LTU, which devotes more resources to verifying the transactions reported by those firms. Using financial statements from practically the entire universe of Spanish firms for the period 1999-2007, we find substantial bunching of firms just below the LTU threshold. On average, we estimate that bunchers reduce their reported revenue by €101,000 (1.7% of total revenue) to avoid falling in the high enforcement regime. Adjusting for resource costs of evasion faced by firms, we estimate that the marginal bunching firm reduces its reported revenue by up to €593,000 (9.9%). The response is weak in sectors where most sales are made to final consumers (retail, restaurants) and strong in sectors where firms sell intermediate goods to other businesses (wholesale, manufacturing). This result suggests that the monitoring effort by the tax authorities and the traceability of the information reported by firms are complements, and both are necessary for effective tax enforcement. Finally, we provide suggestive evidence that firms under low monitoring effort also misreport their material and labour expenditures to evade taxes, even in the presence of third-party reporting.

Keywords: tax enforcement; firms; bunching; Spain; Large Taxpayers Unit (LTU). (search for similar items in EconPapers)
JEL-codes: H26 H32 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2014-07
New Economics Papers: this item is included in nep-eur, nep-iue and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Related works:
Working Paper: Heterogeneous Responses to Effective Tax Enforcement: Evidence from Spanish Firms (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1419

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