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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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

id	okr-10986-24140
recordtype	oai_dc
spelling	okr-10986-241402021-06-14T10:15:39Z Taxation, Information, and Withholding : Evidence from Costa Rica Brockmeyer, Anne Hernandez, Marco 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 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. 2016-04-26T15:53:41Z 2016-04-26T15:53:41Z 2016-03 Working Paper http://documents.worldbank.org/curated/en/2016/03/26068217/taxation-information-withholding-evidence-costa-rica http://hdl.handle.net/10986/24140 English en_US Policy Research Working Paper;No. 7600 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper Latin America & Caribbean Costa Rica
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English en_US
topic	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
spellingShingle	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 Brockmeyer, Anne Hernandez, Marco Taxation, Information, and Withholding : Evidence from Costa Rica
geographic_facet	Latin America & Caribbean Costa Rica
relation	Policy Research Working Paper;No. 7600
description	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.
format	Working Paper
author	Brockmeyer, Anne Hernandez, Marco
author_facet	Brockmeyer, Anne Hernandez, Marco
author_sort	Brockmeyer, Anne
title	Taxation, Information, and Withholding : Evidence from Costa Rica
title_short	Taxation, Information, and Withholding : Evidence from Costa Rica
title_full	Taxation, Information, and Withholding : Evidence from Costa Rica
title_fullStr	Taxation, Information, and Withholding : Evidence from Costa Rica
title_full_unstemmed	Taxation, Information, and Withholding : Evidence from Costa Rica
title_sort	taxation, information, and withholding : evidence from costa rica
publisher	World Bank, Washington, DC
publishDate	2016
url	http://documents.worldbank.org/curated/en/2016/03/26068217/taxation-information-withholding-evidence-costa-rica http://hdl.handle.net/10986/24140
_version_	1764455753580544000

Taxation, Information, and Withholding : Evidence from Costa Rica

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