Table 4 presents the results, using as a control group firms with revenue 10% below the threshold in 2011. The coefficient _β_ on the triple interaction measures to the change in reporting behavior of bunching firms in selected sectors. Column (1) supports our hypothesis: bunching firms in high audit sectors increase their reported revenue by 5 million CRC more than smaller firms in the same sectors and bunching firms in other sectors (10% of their baseline revenue). However, these firms simultaneously increase reported costs by a larger amount (Column 2) leading to a 1.2 million drop in reported profits (Column 3). Nonetheless, their tax liability increase (Column 4), since the audit threat pushed these firms into the 20% tax bracket. We also note that the coefficient _δ_ of the interaction between _Audit_ and _Post_ is positive and significant for reported profit and tax liability: sectors with higher audit intensity remit more taxes. Finally, placebo treatments which assume the treatment occurred in 2009 or in 2010 show no significant effect on any of the four outcomes.

The results show that following an increase in the audit probability, bunching firms report substantially more revenue than smaller firms in their sectors and bunching firms in other sectors. This provides evidence that bunching firms were initially under-reporting their revenue to reach the threshold. We also find that while audits induce bunching firms to report more revenue, taxes paid only slightly increase since firms compensate by over-reporting cost when faced with a higher tax rate. This substitution between cost and revenue evasion following more stringent enforcement mirrors results from recent studies by Carrillo et al. (2017) and Slemrod et al. (2015).

# **7.3 Employment, Wage Bill and Assets**

Breaking firms’ costs into the line items reported on the corporate tax return brings limited insights. Figure A12 shows the discontinuity by revenue for different cost categories. The two main categories, “Administrative & Operational Costs” and “Material & Production Costs” account respectively for 60% and 40% of the total discontinuity. The other categories (interest deductions, depreciation and other costs) only represent 10% of total costs together. None of these categories display a discontinuity at the thresholds. In tax returns, wages are reported in “Administrative & Operational Costs” and cannot be separated. To study employment and wage bill, we instead use social security data which are available from the central bank for 2011 and 2012. Capital is reported on the tax returns. There are two reasons to believe that labor inputs reported in social security records are relatively accurate. First, employees have incentives to report their wages for social security as benefits are generous in Costa Rica. Second, estimated evasion on payroll and personal income tax of wage earners is much lower than evasion on other margins: for example, the ILO estimates that among formal firms in Costa Rica, only 9% of employees are informal. In theory, higher productivity firms need less inputs to produce a given revenue than lower productivity firms: hence employment, wage bill and capital should fall discontinuously at the threshold if firms limit production due to the higher tax rate.

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