Taxation, Information, and Withholding : Evidence from Costa Rica

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, i...

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Bibliographic Details
Main Authors:	Brockmeyer, Anne, Hernandez, Marco
Format:	Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2016
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 http://hdl.handle.net/10986/24140

Description
Summary:	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.

Taxation, Information, and Withholding : Evidence from Costa Rica

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