Audit Publicity and Tax Compliance: A Natural Experiment

AuthorAlessandro Santoro,Simona Gamba,Denvil Duncan,Pietro Battiston
Date01 January 2020
DOIhttp://doi.org/10.1111/sjoe.12330
Published date01 January 2020
Scand. J. of Economics 122(1), 81–108, 2020
DOI: 10.1111/sjoe.12330
Audit Publicity and Tax Compliance: A
Natural Experiment*
Pietro Battiston
Sant
Anna School of Advanced Studies, 56127 Pisa, Italy
me@pietrobattiston.it
Denvil Duncan
Indiana University,Bloomington, IN 47405, USA
duncande@indiana.edu
Simona Gamba
University of Verona, 37129 Verona, Italy
gamba.simona@gmail.com
Alessandro Santoro
University of Milano-Bicocca, 20126 Milan, Italy
alessandro.santoro@unimib.it
Abstract
Weuse confidential data on value-added tax payments at the sector level,in two large Italian cities,
to estimate the effect of audit publicity on the tax compliance of local sellers. By employing a
difference-in-differences identification strategy, we find that such publicity has a positive effect
on fiscal declarations made shortly thereafter. The results suggest that increasing awareness on
future audits via the media can be an important instrument in the hands of tax authorities.
Keywords: Audits; media coverage; social norms; tax evasion
JEL classification:H26; K34; K40
I. Introduction
Tax evasion is a worldwide phenomenon with significant implications
for budgeting, efficiency, and equity. For example, it is estimated that
closing the tax gap would provide additional resources corresponding to
approximately 60 percent of the UK 2013 budget deficit, 155 percent of
the US 2006 budget deficit, and 180 percent of the Italian 2015 budget
*Wewould like to thank participants at conferences and seminars where this work was presented,
as well as three anonymous reviewers. We are particularly grateful to Stefano Pisani, Enrico
Rettore, and Erich Battistin for their helpful comments. Wethank the Italian Revenue Agency for
providingus with the data. The authors bear exclusive responsibility for the use and interpretation
of these data as well as for the results and analysis presented in the paper.
C
The editors of The Scandinavian Journal of Economics 2018.
82 Audit publicity and tax compliance
deficit.1There is also evidence that tax evasion affects allocative efficiency
by influencing market prices (Kopczuk et al., 2016) and the elasticity of
labor supply to tax rate changes (Doerrenberg and Duncan, 2014). While
precise measures of tax evasion are not available for all countries, it is
generally accepted that tax evasion is widespread and that it is a major
problem especially in developing countries. Given the implications of this
issue, a vast body of academic literature has focused on understanding its
determinants (see Hashimzade et al., 2013 for a comprehensive review).
While many contributions highlight the importance of tax rates, audit
probability, and fines (Allingham and Sandmo, 1972; Yitzhaki, 1974;
Rincke and Traxler, 2011) in influencing the decision to evade, it is
generally understood that tax evasion is also sensitive to other factors, such
as the information taxpayers receive on the activities of tax authorities
(Kasper et al., 2015). Information can reach taxpayers through three main
channels: administrator-to-taxpayer communications, taxpayer-to-taxpayer
communications, and media reports. These communication channels can
provide information on audit frequencies and audit targets, which might
affect taxpayers’ perceived audit probability. Additionally, communication
regarding an auditing event can influence an individual’s perception of
the proportion of evaders in the population, which in turn can affect the
individual’s perception of the social norms governing tax evasion. Although
administrator-to-taxpayer and taxpayer-to-taxpayer communications have
been shown to affect tax evasion (Slemrod et al., 2001; Alm et al., 2009;
Kleven et al., 2011; Konrad et al., 2017), there is very little information
on the extent to which media coverage influences the decision to evade.
The impact of public disclosure of information on tax compliance has
gained the attention of several governments around the world. For example,
in Ireland, a list of tax defaulters was reported in national and local
newspapers. According to the tax agency, this measure “aims to raise the
profile of compliance and provide a continuous deterrent to other potential
tax evaders” (Bø et al., 2015). However, the literature has so far focused
1The tax gap is defined as the difference between the amount of tax that should, in theory, be
collected by the revenue agency and what is actually collected. For the UK, the tax gap figure
is taken from Table 1.1 in the HMRC document Measuring Tax Gaps Tables 2015, while the
deficit figure is taken from Table T4.35 in the Office for Budget Responsibility’s November 2015
Economic and Fiscal Outlook: Charts and Tables. For the US, the tax gap figure is from the
Internal Revenue Service Tax Gap Estimates (https://www.irs.gov/newsroom/the-tax-gap), while
the deficit figure is fromTable 1.1 of the Historical Tablesproduced by the Office of Management
and Budget. We refer to the 2006 budget deficit because the most recent tax gap estimates are
for that year. ForItaly, the tax gap figure is taken from Scenari Economici n. 25, Dicembre 2015
of the Centro Studi Confindustria, while the deficit figure is from Table 4 of the December 2015
Bollettino Statistico (Statistical Bulletin) published by the Bank of Italy.
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The editors of The Scandinavian Journal of Economics 2018.

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