Taxation, Information, and Withholding

This paper studies tax withholding on business sales, a widely used compliance mechanism which is largely ignored by public finance theory. The study introduces a withholding scheme, whereby the payer in a transaction collects tax from the payee, in a standard evasion model. If the taxpayer can fully reclaim the tax withheld, withholding is irrelevant to her evasion decision. If reclaim is costly, however, withholding establishes a compliance default. To show this empirically, the analysis exploits a ten-year panel of registration, income tax and sales tax records from 400,000 firms in Costa Rica, and over 20 million third-party information and withholding reports. The paper first documents the anatomy of compliance, providing novel measures of compliance gaps on the extensive, intensive and payment margins. It then shows that interventions leveraging the existing third-party information reduce these compliance gaps only marginally. Coverage by a withholding scheme, in contrast, is correlated with higher reported taxable income both across firms and within firms across time. Quasi-experimental estimations show that a doubling of the withholding rate leads to a 40 percent increase in tax payment among treated firms and a 10 percent increase in aggregate revenue. The mechanisms are incomplete reclaim of the tax withheld and reduced misreporting.

Bibliographic Details

Main Authors:	Brockmeyer, Anne, Hernandez, Marco
Format:	Working Paper biblioteca
Language:	English en_US
Published:	World Bank, Washington, DC 2016-03
Subjects:	AUCTION, TAX ENFORCEMENT, HOLDING, CORPORATION TAX, MARGINAL TAX RATES, LIABILITY, CHECKS, PROPERTY TAX, ADDED TAX, DEFAULTS, PAYMENT OBLIGATIONS, LATE PAYMENTS, INCOME, DEBTORS, INTEREST, COMPLIANCE GAP, DIVIDEND TAX, SAVINGS ACCOUNTS, EXCHANGE, REMITTANCE, LIQUIDITY, EXPORTS, DEVELOPING COUNTRIES, TAX COLLECTION, TAXPAYER COMPLIANCE, DEVELOPING ECONOMIES, POLITICAL ECONOMY, SALES TAX, WORLD DEVELOPMENT INDICATORS, COMPLIANCE GAPS, TAX COMPLIANCE, TAX SYSTEMS, TAX STRUCTURES, TAX, INCOME TAX, CREDIT CARD, TAXABLE INCOME, DUMMY VARIABLE, RESERVE, SAVING, TRANSACTION COST, CORPORATE INCOME TAX, CREDITORS, INTERNATIONAL BANK, ENFORCEMENT MECHANISM, DEVELOPING COUNTRY, WEALTH TAX, AUDITS, TAXPAYER, COMMUNICATIONS, TAX BRACKETS, LABOR MARKET, OPTIMAL TAXATION, SAVINGS, RENT, PERSONAL INCOME, TAX LIABILITIES, VALUE ADDED TAX, RETURN, TAX BASE, PUBLIC FINANCE, PAYMENT METHODS, TAXABLE ACTIVITIES, INCOME LEVELS, TAX SALES, FINANCE, CORPORATE TAX, TAX PAYERS, POWER PARITY, TAXES, TRANSACTIONS, AUCTIONS, TRANSACTION, FEDERAL RESERVE, TAX INCENTIVE, TAX RATE, VOLATILITY, CASH TRANSACTIONS, CAPITAL TAX, PAYMENT OBLIGATION, PROPERTY TAXES, DERIVATIVE, FUTURE, INTERNAL REVENUE, RETURNS, DIVIDEND, GOVERNMENT REVENUE, INPUT TAX, INCOMES, PROPERTY, TAX EVASION, TAX AUDIT, TAX RATES, SHARES, TAX LIABILITY, DEFAULT, MARKET, MIDDLE-INCOME COUNTRY, OUTPUT, TAX REVENUE, GOVERNANCE, FEDERAL RESERVE SYSTEM, ENFORCEMENT, TAXATION, PERSONAL INCOME TAX, RETIREMENT SAVINGS, TRADE, INTERESTS, TAX CREDITS, GOODS, INVESTMENT, SHARE, TAX SYSTEM, BORDER TAXES, TRANSACTIONS COSTS, TAXPAYERS, BUSINESS TAX, SALE OF GOODS, TAX ADMINISTRATION, REVENUE, LEVIES, TAX REPORTS, CHECK, DEDUCTIONS, CORPORATE TAXATION, TAX REFORM, AUDIT, TAX RETURN, INSTRUMENT, CUSTOMERS, RISK AVERSION, LIABILITIES, TAX RETURNS, ASSESSMENT, INCOME VOLATILITY,
Online Access:	http://documents.worldbank.org/curated/en/2016/03/26068217/taxation-information-withholding-evidence-costa-rica https://hdl.handle.net/10986/24140
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