Venezuela’s capital city, Caracas, is comprised of five municipalities, the second of which is Sucre, with an estimated population near 1 MM, covering 164 of the city’s 777 square kilometers. Sucre houses approximately 7,200 firms, requiring a municipal commercial permit. Taxes collected from these firms represent over 60% of total municipal tax income, so compliance with the local business tax represents a very significant matter for local finances. The historical archive includes over 9,000 firms, about 20% of which have had no fiscal activity over the previous three years, which can be interpreted as firms switching to the informal sector, or equivalently, choosing not to report their earnings and evade the corresponding taxes. Of the 7,200 active firms, about 900 were excluded from the study because they were located in sparsely populated (almost rural) areas within the municipality which make them hard to reach and therefore costly to get a communication to via private courier.
We empirically asses the relative importance of both the deterrence and tax morale models for explaining tax compliance. We follow the existing literature that induces an exogenous change in firm’s perception about tax control, on one hand, and of moral suasion, on the other, by randomly sending letters to different treatment groups. Specifically, we divide the entire study sample into six groups and send letters to five different groups of firms5. One letter described planned changes in the municipal tax administration office that would improve tax control and enforcement. In particular it mentions the hiring of new inspectors and vehicles that will facilitate the implementation of audits and also the acquisition of new information and technology systems that will allow a more precise identification of tax payers. Another letter aimed at strengthening tax morale by simply stressing the importance of complying with tax obligations. Two additional letters investigate the reciprocity hypothesis. One informs about policies geared to improving the provision of general public goods and business services. For example, it details policies aiming at strengthening citizen security (police), basic infrastructure (public transportation, public lighting and waste management) and formal economic activity (control of illegal commerce). A second letter mentions initiatives regarding social assistance for the poor and the elderly, and improvements in public health services. Finally, we send a placebo-type letter that just informed the new address of the tax administration office, which was information common to all other letters as well.