DETERRENCE AND RECIPROCITY EFFECTS ON TAX COMPLIANCE: EXPERIMENTAL EVIDENCE FROM VENEZUELA
Last registered on August 21, 2014

Pre-Trial

Trial Information
General Information
Title
DETERRENCE AND RECIPROCITY EFFECTS ON TAX COMPLIANCE: EXPERIMENTAL EVIDENCE FROM VENEZUELA
RCT ID
AEARCTR-0000491
Initial registration date
August 21, 2014
Last updated
August 21, 2014 4:31 PM EDT
Location(s)
Primary Investigator
Affiliation
CAF - Development Bank of Latin America
Other Primary Investigator(s)
PI Affiliation
CAF and IESA
PI Affiliation
CAF and UTDT
Additional Trial Information
Status
Completed
Start date
2011-02-01
End date
2012-07-01
Secondary IDs
Abstract
A recent debate on tax compliance asks whether enforcement mechanisms can be complemented, or even substituted by appeals to the taxpayer’s tax morality: his or her intrinsic willingness to pay taxes, motivated by purely ethical reasons, or a feeling of reciprocity towards the government that provides public goods and services of varying quality. We evaluate this hypothesis by tracking the local business tax compliance of over 6,000 firms in a major municipality in Caracas, which we ¿ randomly assigned to a control of no stimulus, or to one of five treatment arms that received ¿ letters from the local tax administrator with different types of messages regarding tax compliance. We find that an enforcement message has the largest compliance effect, while moral suasion appears less effective. However, differences between letter types have impacts that cannot be statistically distinguished from each other, which we interpret as an effect of being contacted by the tax authority by written communication, regardless of the content. This is most likely to matter for firms unaccustomed to contact with the government –small firms– which are also those for which we find economically large effects.
External Link(s)
Registration Citation
Citation
CAF, Pilar, Daniel Ortega and Pablo Sanguinetti. 2014. "DETERRENCE AND RECIPROCITY EFFECTS ON TAX COMPLIANCE: EXPERIMENTAL EVIDENCE FROM VENEZUELA." AEA RCT Registry. August 21. https://www.socialscienceregistry.org/trials/491/history/2587
Sponsors & Partners

There are documents in this trial unavailable to the public. Use the button below to request access to this information.

Request Information
Experimental Details
Interventions
Intervention(s)
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.
Intervention Start Date
2011-06-01
Intervention End Date
2011-07-01
Primary Outcomes
Primary Outcomes (end points)
Tax balance
Primary Outcomes (explanation)
Tax balances were calculated as the difference between tax accruements and tax payments for each firm. All variables expressed as proportions of sales.
Secondary Outcomes
Secondary Outcomes (end points)
Secondary Outcomes (explanation)
Experimental Design
Experimental Design
Roughly 1,000 firms were randomly selected to receive the enforcement and each of the reciprocity letters, 700 were selected for the tax morale letter, 800 for the placebo letter and about 1600 were left in the control group with no letter or intervention whatsoever. Of these 6,000 firms, about 4,600 had complete 2011 income projections (which we use to normalize each firm’s debt balance). In the end only 3,180 of an intended 4,500 letters were distributed (70% success rate) by private courier across the entire geography of the municipality.
Experimental Design Details
Roughly 1,000 firms were randomly selected to receive the enforcement and each of the reciprocity letters, 700 were selected for the tax morale letter, 800 for the placebo letter and about 1600 were left in the control group with no letter or intervention whatsoever. Of these 6,000 firms, about 4,600 had complete 2011 income projections (which we use to normalize each firm’s debt balance). In the end only 3,180 of an intended 4,500 letters were distributed (70% success rate) by private courier across the entire geography of the municipality.
Randomization Method
Firms were assigned to each treatment status by a computer algorithm
Randomization Unit
Firm
Was the treatment clustered?
No
Experiment Characteristics
Sample size: planned number of clusters
No clustering
Sample size: planned number of observations
6100 firms
Sample size (or number of clusters) by treatment arms
Approximately 1000 firms were assigned to receive the enforcement letter, approximately 1000 firms were assigned to receive two different reciprocity letters, 700 to receive the tax morale letter, 800 to receive a placebo letter and 1600 to be part of the control group
Minimum detectable effect size for main outcomes (accounting for sample design and clustering)
NA
IRB
INSTITUTIONAL REVIEW BOARDS (IRBs)
IRB Name
IRB Approval Date
IRB Approval Number
Post-Trial
Post Trial Information
Study Withdrawal
Intervention
Is the intervention completed?
Yes
Intervention Completion Date
July 01, 2011, 12:00 AM +00:00
Is data collection complete?
Yes
Data Collection Completion Date
February 01, 2012, 12:00 AM +00:00
Final Sample Size: Number of Clusters (Unit of Randomization)
6100 firms
Was attrition correlated with treatment status?
No
Final Sample Size: Total Number of Observations
6100 firms
Final Sample Size (or Number of Clusters) by Treatment Arms
Approximately 1000 enforcement letter and two different reciprocity letters, 700 tax morale letter, 800 placebo letter, 1600 control group
Data Publication
Data Publication
Is public data available?
No
Program Files
Program Files
Reports and Papers
Preliminary Reports
Relevant Papers
Abstract
A recent debate on tax compliance asks whether enforcement mechanisms can be complemented, or even substituted by appeals to the taxpayer’s tax morality: his or her intrinsic willingness to pay taxes, motivated by purely ethical reasons, or a feeling of reciprocity towards the government that provides public goods and services of varying quality. We evaluate this hypothesis by tracking the local business tax compliance of over 6,000 firms in a major municipality in Caracas, which we randomly assigned to a control of no stimulus, or to one of five treatment arms that received letters from the local tax administrator with different types of messages regarding tax compliance. We find that an enforcement message has the largest compliance effect, while moral suasion appears less effective. However, differences between letter types have impacts that cannot be statistically distinguished from each other, which we interpret as an effect of being contacted by the tax authority by written communication, regardless of the content. This is most likely to matter for firms unaccustomed to contact with the government –small firms– which are also those for which we find economically large effects.
Citation
Ortega, D. and Sanguinetti, P. (2013). "Deterrence and reciprocity effects on tax compliance: Experimental evidence from Venezuela". CAF Working Paper. N° 2013/08.