on third-party reported margins is unlikely to yield large revenue gains. In such an environment, expanding the coverage of third-party information, and the application of withholding mechanisms to third-party reported sales, may be a much higher-return investment than increased enforcement, a question that we turn to in the next two sections.

# 5 Impact of Information Reporting

This section examines the compliance impact of information reporting while section 6 isolates the impact of withholding. We rst analyze the heterogeneity of bunching, as a proxy for misreporting, across subsamples of rms with dierent degrees of information reporting coverage, and then conduct an event study of the response to information reporting.

## 5.1 Heterogeneity in Bunching

Bunching at kinks or notches in the tax schedule has been used in numerous studies to estimate the response of reported taxable income to the tax rate, and bunching is usually shown to be driven by an evasion/avoidance response rather than a real response (e.g. Bachas & Soto 2016,Almunia & Rodriguez 2015, Seim 2015). Consistent with this, we observe large and sharp bunching at the rst kink in the self-employed tax schedule and at the rst notch in the corporate tax schedule.<sup>32</sup> Taking the example of the self-employed (results are similar for corporations), Figure IV shows that bunching moves every single year with the location of the kink. There is rarely any excess mass at the previous year's kink, suggesting that rms adjust almost immediately and fully to the new kink location. The consistent and speedy adjustment supports the interpretation of bunching as a reporting response rather than a real production change.<sup>33</sup> We thus use bunching as a proxy for misreporting.

To examine the heterogeneity of bunching with coverage by information reporting, we pool the data for 2006 to 2015 and display the distribution as percentage dierence from the year-specic

> 32The rst threshold in each schedule is the most salient one, and also the largest in terms of the tax rate change for teh self-employed. Bunching is also present but smaller at the other thresholds.

> 33Strikingly, the excess mass is always concentrated to the left of the kink. For the years 2010 to 2014, the distribution also displays a clear missing mass to the right of the kink, which is at odds with the prediction of standard utility theory. This theory predicts that kinks generate symmetric bunching around the threshold, and notches generate asymmetric bunching below the threshold and a missing mass in a dominated range above the threshold Kleven & Waseem (2013). However, as discussed in Kleven (2016), several studies have found asymmetric bunching also at kink points, suggesting that taxpayers may perceive a kink as a notch. One possible explation is that crossing the kink may be associated with a xed cost, such as having to make a payment, as is the case for the rst kink in the self-employed tax schedule in Costa Rica. However, tax payments can be done online and should generate little transaction cost in Costa Rica. Another explanation is that the threshold creates a reference point, which constitutes a notch in the rm's utility function, so that bunching is driven by reference point dependence rather than the traditionally assumed response to the nancial incentive change at the kink. This warrents caution when using bunching to estimate the elasticity of taxable income, but does not prevent us from interpreting bunching as a measure of misreporting which generates a revenue loss for the government.

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