Evaluating compliance gains of expanding tax enforcement

Abstract

This paper demonstrates how tax administrations can evaluate future compliance gains from risk-based tax enforcement that audits all taxpayers above a risk threshold. Expanding tax enforcement in this setting means reducing the audit threshold. The compliance gains from such an expansion consist of a mechanical audit correction effect and a behavioural effect that reflects changes in self-reporting in the subsequent years. We estimate this behavioural effect in a regression discontinuity analysis with the risk score as the forcing variable. We find that taxpayers at the margin had a significant reduction in self-reported deductions in the next years' tax filing. The behavioural effect over a three-year post-audit period is estimated to be of a magnitude similar to that of the direct adjustment of the audit. This compliance effect does not change when we include the reporting of the spouse. We find that the risk score threshold that maximizes net public revenue from the audits is considerably below current practice.