Research

The collection of value added tax (VAT) is essential for achieving domestic revenue objectives, yet VAT gap estimation is rarely performed in developing countries. This study utilizes innovative tax declaration and audit data to estimate VAT misreporting in Tanzania, applying a machine learning approach to predict evasion in unaudited firms and periods. We measure the underreporting component of the compliance gap, quantifying potential revenue losses due to inaccurate reporting. Our findings indicate that firms often avoid excessive audits, leading to increased evasion, with those firms showing the largest VAT gaps. We estimate a 62% VAT gap among small and medium-sized enterprises in Tanzania. Finally, we present a cost-benefit ratio, suggesting that while auditing sectors with large VAT gaps is cost-effective, those contributing significantly to the overall VAT gap should also be prioritized for revenue generation.

Presented at the IIPF Annual Conference 2024*, Wider Development conference 2023, FIT seminar (Tampere) 2023.

This research examines the impact of occupational choices and tax evasion on the tax administration policy in a hierarchical tax model. The economy has two sectors, wage-earners and self-employment, with evasion only possible in the latter. Incorporating occupational decisions produces a smaller marginal tax rate and a larger budget for the IRS. However, the resources are still insufficient to audit all self-employed, resulting in distortions in occupational choices favoring self-employment. These distortions prevent production efficiency from achieving the optimum level, indicating that the Diamond-Mirrlees theorem is not applicable in this context. Finally, applying differential taxation represents a Pareto improvement, but it results in higher taxes for self-employment.

Presented at Universidad Alberto Hurtado (Chile), IIPF Anual Conference 2021, SECHi Annual Meeting 2021, and LACEA/LAMES 2021. 

We analyze the impact of an expansion in government aid for higher education in Chile in a sample of elementary and high school students. Using students who had an alternative source of funding as a control group, and administrative records before and after the reform, we present evidence that students are affected in different ways. First, we show that parents of students who ex ante were more likely to be credit restricted are more likely after the reform to report that their child ends up completing college. Second, we find that students in the same groups that increase their college expectations, obtain a score in high-stakes examination that actually qualified them for college aid. Third, we find that lifting future credit restrictions reduces the probability of dropping out of high school.

This paper studies the causal effect of income tax evasion opportunities on the self-employment decision. Two peculiarities of the Chilean scheme enable us to identify this effect. First, in the Chilean tax design, self-employed and wage-earners are levied with equal marginal taxes, eliminating the differential tax effect. We disentangle two channels through an occupational choice model: taxable income and evasion. Second, we exploit a tax reform that exogenously affects agents' evasion decisions. Following a consumption-based approach, we obtain a tax evasion measure, and estimate two behavioral parameters: (i) the evasion elasticity to marginal tax rate equals 1.4; (ii) an increase of 1 percentage point in the evasion opportunity makes being self-employed 6.1 percentage points more likely. The evasion opportunity is a crucial determinant of the self-employment response to the policy change, mainly driven by agents' behavior near the first income bracket. While women-headed households' evasion behavior is less sensitive to a tax change, having higher education primarily drives this behavior. 

Presented at the RIDGE Labor Workshop 2021*, SECHi Annual Meeting 2022*, Pontificia Universidad Católica de Chile, LACEA/LAMES 2021, Universitat de les Illes Balears, RIDGE Workshop on Public Economics 2022, IIPF Anual Conference 2022, Helsinki GSE, FIT Workshop 2022, SECHi Annual Meeting 2023* , Economics of Informality Conference 2022*, LACEA/LAMES 2023*, and M-NEW Annual Workshop*.

*Presented by Romina

Redistributive policies are crucial in tax design but are often overlooked when examining optimal tax administrative policies to fight tax evasion. This paper extends the Keen and Slemrod (2017) framework to analyse how redistributive concerns and inequality aversion affect tax administration. Optimal tax enforcement strategies depend on the connection between private concealment costs and inequality aversion. With social marginal welfare weights falling in income, society chooses less strict enforcement and a larger implied optimal tax gap if concealment costs are relatively high among low-income individuals. Income-dependent enforcement policies also need to account for the impact of these policies on the selection of income-earners to different regimes. When income is taxed in a non-linear fashion, the optimal income tax includes additional considerations arising from concealment costs. 

Presented at: IIPF Annual Conference 2025*, Coe-FIT workshop 2025

*Presented by Jukka

Different tax evasion possibilities in occupations affect agents' employment decisions with welfare implications, being critical elements for accurately measure the welfare consequences of tax changes. In the context of progressive piecewise tax schemes and tax evasion, this paper studies the welfare effects of tax changes incorporating those elements previously omitted in the literature. We model an economy with occupational decisions and a piecewise progressive tax scheme, where self-employed can bunch at the income bracket threshold declaring less income to face a smaller marginal tax rate than they owe. Later, we characterize the welfare effect of tax change, allowing for evasion, occupational decisions, and introducing frictions originating from the tax system characteristics, particularly bunching. Those elements produce a divergence with the elasticity of taxable income or total earned income. We propose a new metric to estimate the marginal change in welfare based on a trapezoid, complementing the traditional Harberger's triangle measure. Considering a tax reform in Chile, we estimate the welfare change of this reform, demonstrating the relevance of incorporating occupational decisions and tax evasion for welfare measurement.

Presented at the IIPF Annual Conference 2024, Brown Bag University. of Chile (Econ), Alberto Hurtado University.

*Presented by Romina

Tax enforcement increasingly uses classification data reported by taxpayers to determine eligibility for lower rates, deductions, and exemptions. This improves the targeting of both tax policy and audits but also creates new opportunities for evasion. We investigate how tax authorities can use such information while accounting for its strategic distortion. Restoring deterrence generates a global \emph{verification frontier}: every report below the frontier is verified through either a profit audit or data verification. With a decreasing inverse hazard rate, profit audits extend to class-specific cutoffs, whereas data audits cover the region beneath the frontier. With an increasing inverse hazard rate, some classes are enforced through profit audits, while the remaining classes instead require data verification. Optimal implementation is characterized by profit bunching but involves no data bunching.

Presented at the IIPF Annual Conference 2024, University of Chile (DCS).

*Presented by Saara or Eduardo

I study optimal audit design when auditing changes how much taxpayers work and which occupation they choose. The classic result in this literature is a cutoff rule — audit everything below a threshold, nothing above. I show this holds only under three conditions together: penalties assessed on undeclared income, a linear audit technology, and exogenous income. Relax any one and the optimal schedule is interior and smoothly declining. In the resulting model the direct revenue effect of an audit is negative at every type, so auditing pays through screening rather than collection; full deterrence is never optimal, and this is a property of liability-based penalty statutes rather than of auditing itself. 

Chile offers two subsidies for voluntary retirement saving side by side: a flat 15% state match and an income-tax deduction, chosen by the same worker for the same peso. Because the income-tax base is narrow, the match dominates the deduction for almost everyone — yet 99.7% of deduction users never exhaust the match they are entitled to, and four in five hold none of it. The pattern holds at the largest contributions and among the most financially sophisticated. A 2013 reform that cut the deduction's value by a fifth shifted the composition of saving between vehicles but recruited nobody, and three pre-registered tests of price-based optimisation find no response at any margin. In a narrow tax base, the problem with a deduction is not its generosity but that its price is not what workers respond to.