No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax

TLDR

VAT is widely adopted partly because it creates paper trails that supposedly aid enforcement, yet evidence for this is scarce. The study investigates the role of third‑party information in VAT enforcement. It employs two randomized experiments involving more than 400,000 Chilean firms. Announcing additional monitoring has little effect on transactions already subject to a paper trail, confirming the trail’s deterrent role and producing strong enforcement spillovers up the VAT chain, and showing that evasion considerations create significant differences between otherwise equivalent tax forms. JEL codes: D83, H25, H26, K34, O17.

Abstract

Claims that the VAT facilitates tax enforcement by generating paper trails on transactions between firms contributed to widespread VAT adoption worldwide, but there is surprisingly little evidence. This paper analyzes the role of third-party information for VAT enforcement through two randomized experiments among over 400,000 Chilean firms. Announcing additional monitoring has less impact on transactions that are subject to a paper trail, indicating the paper trail's preventive deterrence effect. This leads to strong enforcement spillovers up the VAT chain. These findings confirm that when taking evasion into account, significant differences emerge between otherwise equivalent forms of taxation. (JEL D83, H25, H26, K34, O17)