Thursday, 20 January 2011

Love letters from the tax authority can work wonders

Dina Pomeranz (Harvard/MIT) gave a jobtalk yesterday. She conducted a clever experiment with the help of the Chilean tax authorities. Sending vaguely threatening letters to firms that are suspected of VAT evasion, they look at what happens to the amounts declared not just by the firm itself, but by suppliers and clients. Interestingly, she can show how collection goes up along the value added chain. In particular, there is a big effect for final sales reporting, where the self-reinforcing nature of VAT does not apply -- which in turn suggests that it is working pretty well at other stages of the value added chain.

Funnily enough, the New York Times published an article on the same day that Dina was here, on the unexpectedly large tax haul for the Spanish authorities in 2010 -- up by a quarter, equivalent to some €10 bn. Perhaps the autorities here should try and send a few, vaguely menacing letters? As it happens, I had the new Catalan Director General for Economics and Finance, Albert Carreras, in my office this week. Albert is a colleague at UPF, and the outgoing dean there - and many moons ago advised me when I studied at EUI. We talked about budget woes and possible taxes. I might drop him a line with Dina's paper...

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