metadata: authors: 0: author: Brockmeyer,Anne
1: author: Hernandez Hernandez,Marco Antonio
2: author: Kettle,Stewart
3: author: Smith,Spencer Douglas
count: Costa Rica
docna: 0: docna: Casting the tax net wider : experimental
            evidence from Costa Rica
docty: Policy Research Working Paper
subtopic: Public Finance Decentralization and
            Poverty Reduction,Tax Administration,Tax Law,Public Sector Economics,Macro-Fiscal Policy,Economic Adjustment and Lending,Public Sector Management and Reform,Taxation & Subsidies,Transport Services
teratopic: Law and Development,Transport,Public Sector Development,Macroeconomics and Economic Growth
abstracts: cdata!: The majority of firms in developing
            countries are informal, and encouraging them to register
            with the tax authority has proven challenging and costly.
            This paper argues that incomplete tax filing among
            registered firms constitutes an important intermediate form
            of informality, which can be tackled with much higher
            cost-effectiveness. Using a nationwide randomized experiment
            in Costa Rica, The paper shows that credible enforcement
            emails tripled the income tax filing rate and doubled the
            payment rate among previously non-filing firms. The
            treatment effect was even higher when the email listed
            examples of third-party reports of a firm's
            transactions, with the return on an email reaching US$ 19.
            It also shows that the intervention had no negative
            spillovers on other tax compliance dimensions, the treatment
            effects persisted in the medium term, and treated firms
            became more likely to file information reports about their
            suppliers or clients, thereby increasing the tax
            authorities~^!!^ information set for future tax enforcement.
geo_reg_key: 119228,517191,545133
repnme: repnme: Casting the tax net wider : experimental
            evidence from Costa Rica
display_title: Casting the tax net wider :
            experimental evidence from Costa Rica
listing_relative_url: /research/2016/10/26843269/casting-tax-net-wider-experimental-evidence-costa-rica
topicv3: Business Taxation m1326300 1285,Human Resources m1326304 1211,Transport m1326661 135,Tax and Revenue Policy and Administration
            m1327008 720,Taxation m1327615 1121
publishtoextweb_dt: 2016-10-05T00:00:00Z
historic_topic: Law and Development,Transport,Public Sector Development,Macroeconomics and Economic Growth
no_of_pages: 56
author_keys: 0: author_key: 1137092
1: author_key: 1187339
2: author_key: NA
3: author_key: 1382161
model_extractions: WPS7850 Policy Research Working Paper 7850 Casting the Tax Net Wider Experimental Evidence from Costa Rica _Anne Brockmeyer Marco Hernandez Stewart Kettle Spencer Smith_ Macroeconomics and Fiscal Management Global Practice Group October 2016
Policy Research Working Paper 7850

# **Abstract**

The majority of firms in developing countries are informal, and encouraging them to register with the tax authority has proven challenging and costly. This paper argues that incomplete tax filing among registered firms constitutes an important intermediate form of informality, which can be tackled with much higher cost-effectiveness. Using a nationwide randomized experiment in Costa Rica, The paper shows that credible enforcement emails tripled the income tax filing rate and doubled the payment rate among previously non-filing firms. The treatment effect was even higher when the email listed examples of third-party reports of a firm’s transactions, with the return on an email reaching US$ 19. It also shows that the intervention had no negative spillovers on other tax compliance dimensions, the treatment effects persisted in the medium term, and treated firms became more likely to file information reports about their suppliers or clients, thereby increasing the tax authorities’ information set for future tax enforcement.

This paper is a product of the Macroeconomics and Fiscal Management Global Practice Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at abrockmeyer@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# Casting the Tax Net Wider:

# Experimental Evidence from Costa Rica

Anne Brockmeyer, Marco Hernandez, Stewart Kettle, and Spencer Smith<sup>*</sup> Keywords: informality, tax evasion, rms, communication experiment. JEL codes: H25, H26, H32, O10.

> *Brockmeyer: The World Bank, email: abrockmeyer@worldbank.org; Hernandez: The World Bank, email: marcohernandez@worldbank.org; Kettle: Behavioural Insights Team, email: stewart.kettle@behaviouralinsights.co.uk; Smith: Department of Economics, University of Oxford, email: spencer.smith@economics.ox.ac.uk. We thank Christopher Adam, Miriam Bruhn, David McKenzie, Simon Quinn, Gabriel Tourek, and seminar/conference participants at the Pacic Conference for Development Economics, the Centre for the Studies of African Economies Conference, the Oxford University Development Lunch, and the Centre for Business Taxation Seminar for helpful comments. We are grateful to the Ministry of Finance and the General Directorate of Taxation of Costa Rica for their collaboration. In particular, we thank Fernando Rodriguez Garro and Carlos Vargas Duran, as well as to Laura Badilla Castro, Lorena Chacon Sanchez, Graciela Garcia Santamaria, Mercedes Padilla Delgado, Manuel Enrique Ramos Campos, Karla Salas Corrales, Ronald Solorzano Vega, and Giovanni Tencio Pereira. All errors are our own.
# 1 Introduction

Developing countries struggle to raise sucient tax revenues to fund public services and anti-poverty programs. Indeed, low income countries have signicantly lower tax to GDP ratios than high income countries, despite similar tax rates for major taxes (Gordon and Li 2009; Besley and Persson 2013). A large part of the tax revenue gap can thus be explained by low compliance with statutory tax obligations, one key aspect of which is non-ling. In Costa Rica, about 25% of tax-registered rms, and over 60% of rms that are unregistered but known to the tax authority through third-party reports from other rms do not le their income tax declaration. The numbers are similar in Guatemala, where 28% of registered rms do not le, and across the Latin America region, where the average non-ling rate ranges from 20% to 30%.<sup>1</sup> Similar to other forms of non-compliance, nonling generates costs in terms of lost government revenue, horizontal inequity between taxpayers, and resource misallocation (Skinner and Slemrod 1985; Gordon and Li 2009). Yet, despite its empirical importance, non-ling has received little attention in the literature, which has focused on tax registration of fully informal rms<sup>2</sup> (e.g. De Andrade, Bruhn, and McKenzie 2014) and misreporting among tax lers (e.g. Carrillo, Pomeranz, and Singhal 2016), notably nding these compliance gaps dicult to address.<sup>3</sup> This paper argues that compliance at the tax ling margin can be enhanced with simple and highly cost-eective interventions. We evaluate a nation-wide randomized trial conducted by the tax authority of Costa Rica, in which 49,757 non-ling rms were requested by email to submit their income tax declaration for 2014.<sup>4</sup> To design the strongest possible message, the emails combined three features tested in previous communication interventions aimed at reducing misreporting or payment arrears. Specically, the emails contained strong deterrence content, integrated insights

> 1Kettle et al. (2016) for Guatemala. In discussion with the authors, ocials from the Inter-American Center of Tax Administrations reported an average non-ling rate of 20-30% among tax registered rms in the region. A taxpayer is considered a non-ler if it does not le within two months of the ling deadline.

> 2For the purpose of this paper, rms that are not tax registered are considered fully informal. Firms that comply partially but not fully with their tax ling obligations (e.g. le income tax but not sales tax, or do not le regularly) are considered partially informal.

> 3Formalizing rms has proven challenging and costly, because the rms' (private) benet of formalization is often lower than the cost of formalization, especially for small rms (McKenzie and Sakho 2010; de Mel, McKenzie, and Woodru 2013; Bruhn and McKenzie 2013). Interventions to reduce misreporting have shown success for the valueadded tax (Pomeranz 2015; Naritomi 2015), but have been less successful for the income tax, where rms can shift evasion from the sales margin to the less veriable cost margin (Carrillo, Pomeranz, and Singhal 2016; Slemrod et al. 2015).

> 4Table 1 summarizes the experiment. A parallel SMS experiment, which targeted rms that did not have an email address but had a cell phone number on le, is discussed in the Appendix. It is unfortunately not possible to track which rms received or opened the message.

2
from behavioral economics, and, where possible, leveraged third-party information that the tax authority collected about taxpayers' business activities.

The deterrence content included a threat of audit (as in Slemrod, Blumenthal, and Christian (2001), Kleven et al. (2011), and Pomeranz (2015)) and of a temporary rm closure, as well as a threat of public shaming through the publication of a list of non-lers online (similar to PerezTruglia and Troiano (2016)). These deterrence messages are strong but credible. Every year, the tax authority conducts approximately 550 audits<sup>5</sup> , targeting rms with large estimated tax liabilities regardless of their ling status, and realizes several hundred week-long rm closures, which cover all four administrative regions of the country.<sup>6</sup> The threat of audit and shop closure are routinely used by the tax authority in compliance communications with taxpayers.<sup>7</sup> While the likelihood of an audit or shop closure for any particular rm is low, the monetary and particularly the reputational costs are substantive. Shop closures for instance, are accompanied by an ocial sign on the business's door indicating closure by the tax authority. The authority also began to publish names of non-lers for the sales tax in August 2015, and routinely publishes the names of late-payers, i.e. taxpayers who led but have outstanding liabilities to pay.

Additionally, the emails incorporated insights from behavioral economics, such as personalization of the messages (Haynes et al. 2013), the inclusion of a clear call to action (Gabaix and Laibson 2005; BIT 2015) and of a direct web link to the income tax declaration (BIT 2014), simplied text (BIT 2014; Dwenger et al. 2016), and a social norm statement (e.g., 8 out of 10 taxpayers have already led) (Wenzel 2005; Hallsworth et al. 2014; Del Carpio 2014; ).<sup>8</sup> Finally, the messages leveraged available third-party reported information about taxpayers' business activities, i.e. information that the tax authority collects through informative declarations presented by other rms, state institutions and credit/debit card processing companies.<sup>9</sup> In the sample

> 5The number of audits realized in 2012, 2013 and 2014 were 537, 667 and 752, respectively. Of these, less than 10% were targeted at large taxpayers.

> 6In 2014, the tax authority conducted 293 rm closures, of which 94 were for non-ling, 167 for non-payment and 32 for irregularities in the use of receipts. The distribution of rm closures across regions corresponds approximately to the distribution of population and economic activity. Of the total, 140 closures took place in the central region, 65 in the south, 52 in the north, 36 in the pacic region. In 2015, the tax authority conducted 138 closures, of which 45 were for non-ling, 73 for non-payment and 20 for irregularities in the use of receipts. 83 closures were still pending as of December 2015. The circumstances triggering rm closure are outlined in Costa Rica's Reglamento de Procedimiento Tributario, articles 252-269.

> 7Previous communication campaigns conducted by the tax authority did not incorporate all late-lers and varied both the method of communication (emails, phone calls, personal visits) and the content of the messages for dierent groups in a non-random way.

> 8Some studies cited in Hallsworth (2014) nd that a social norm can backre among relatively compliant taxpayers. This is not a concern for our study, which deals only with non-compliers, none of whom conform to the norm.

> 9Third-party reporting requirements in Costa Rica are described in more detail in Section 2.

3
of rms for which no third-party information was available, the emails either did not mention thirdparty information at all (treatment 1), or mentioned the general use of these information by the tax authority (treatment 2), without making a statement about the (non-)availability of information for the taxpayer in question. In the sample of rms for which third-party information was available, the emails either mentioned the existence of third-party information about the taxpayer in question (treatment 1), or provided specic examples of the taxpayer's third-party reported sales, such as the name of a client rm and the reported purchase amount (treatment 2). Unlike Carrillo, Pomeranz, and Singhal (2016), we use examples rather than the total amount of third-party reported sales in the message, as the amounts are small for many taxpayers, and it is possible that rms over-estimate the total amount of third-party reports, in which case providing examples rather than specic amounts might lead to larger compliance gains. The experiment design allows us to test whether the existence of third-party information increases rms' response to a baseline deterrence message and whether leveraging third-party information can further strengthen the message.

We analyze the impact of the intervention using rich administrative data on multiple taxes and ling obligations of rms, and nd three sets of results. First, the emails sent to non-lers tripled their rate of income tax ling and more than doubled the rate and amount of payment, relative to the control group that received no message. Among rms covered by third-party information, listing specic examples of third-party information about the rm had an additional positive eect on all outcomes, and signicantly increased the rate of ling by two percentage points (p.p.). The ling rate reached 34% among rms covered by third-party information and 19% among rms not covered by third-party information. While the proportional treatment eect is larger in the latter group, the absolute eect on payment is an order of magnitude larger in the former group. The return on the (strongest) email is US$ 19 for rms with third-party information and US$ 0.39 for rms without third-party information.<sup>10</sup> Second, we advance the understanding of compliance spillover eects by examining whether the treatment had an impact on a wide variety of compliance outcomes that were not specically targeted by the intervention. The possibility of negative spillovers on other compliance margins is indeed a key concern for compliance interventions. In our experiment, we nd no negative impact on compliance with sales tax ling or payment, and a signicant but small increase in the deregistration rate by 1-2 p.p., though this latter result applies only to rms with extremely small reported tax

> 10Figures in US dollars are calculated using an exchange rate of 545 Costa Rican colones (CRC) per U.S. dollar.

4
liabilities. Instead, we nd that the intervention increased the rate of income tax ling and payment, both in the scal years prior to the interventionmeaning that treated taxpayers were more likely to catch up with previous outstanding obligationsand also in the year following the intervention. The persistence of the treatment eect one year later without any further communication suggests that the intervention did not just act as a reminder or nudge, but led taxpayers to update their belief about enforcement. In addition, we nd that the emails, and particularly those mentioning specic examples of third-party information, induced a higher share of rms to le an informative declaration, reporting transactions with clients and suppliers, an eect that also persists in the year following the intervention. This means the intervention increased the tax authority's information set for future tax enforcement.

Third, in an eort to provide guidance for targeting future communication interventions, we analyze heterogeneity in the main treatment eect on tax ling and payment. We nd that the impact on ling is driven by smaller rms and the self-employed, and the impact on payment is driven by larger rms, particularly corporations. This can be explained by the presence of an exemption threshold in the tax schedule for the self-employed, but not for corporations. We also nd that rms with a better past compliance record respond more strongly to the treatment. Finally, we provide some evidence suggesting that the treatment mentioning specic examples of third-party information generates an improvement in taxpayers' reporting behavior conditional on ling, leading rms to declare higher sales without fully osetting this eect through a cost increase.

Given an overall cost-benet ratio of about 1:5, we conclude that the email intervention is a costeective and sustainable way to cast the tax net wider, by not only increasing present compliance but also past and future compliance among targeted taxpayers, as well as broadening the tax authority's information set for future tax enforcement. Targeting the intervention at rms covered by third-party information, particularly corporations, and those with a better past compliance record can further increase cost-eectiveness.

This paper contributes to three strands of literature. First, we contribute to the literature on taxation and development, as reviewed in Besley and Persson (2013), that analyzed how tax capacity grows along the development path and which interventions are best suited to accelerate this process. While most recent contributions in this literature have focused on misreporting on the intensive margin (Best et al. 2015; Pomeranz 2015; Naritomi 2015, Carrillo, Pomeranz, and Singhal 2016), our study highlights the importance of compliance gaps on the extensive margin, 5
and the cost-eectiveness of simple interventions to reduce these compliance gaps. In this sense, our study is a complement to Brockmeyer and Hernandez (2016) who conduct a systematic anatomy of compliance in Costa Rica, uncovering substantial compliance gaps on the extensive margin. The role of third-party information in enhancing tax compliance has featured prominently in the literature (Kleven et al. 2011; Kleven, Kreiner, and Saez 2015). Third-party reporting has been shown to enhance tax compliance at the intensive margin for the value-added tax (Pomeranz 2015; Naritomi 2015), but was also found to generate evasion shifting to the cost margin, when applied to income taxation (Carrillo, Pomeranz, and Singhal 2016, Slemrod et al. 2015). Our study focuses on the role of third-party reporting in enhancing compliance on the extensive margin, showing that information is both a tool for strengthening deterrence interventions and a by-product of better ling compliance.

Second, this experiment adds to other communication experiments to increase tax compliance, as reviewed in Dwenger et al. (2016) and Hallsworth (2014). Our study uses a cost eective delivery method - emails - and maximizes message impact by combining dierent message elements that have proven successful in other contexts. As expected, the observed treatment eect of our emails is substantially larger than treatment eects in most other studies. Besides, our study is one of few in this literature to focus on rms, including corporations, as opposed to individual taxpayers, and the rst with Kettle et al. (2016) to focus on tax ling.<sup>11</sup> Indeed, most studies in this literature have focused on correct reporting of liabilities or on the payment of already assessed liabilities, such as property tax liabilities. Furthermore, we extend the literature by using rich administrative data to measure a variety of outcomes. Contrary to compliance crowd-out, we nd positive impacts on compliance in prior tax periods, ling of informative declarations, and a persistence of the main treatment eects in the medium term.

Finally, this paper contributes to the literature on rm formalization, as reviewed in Bruhn and McKenzie (2014) and De Andrade, Bruhn, and McKenzie (2014). This literature found that providing information, reducing registration costs or simplifying regulation is relatively ineective in encouraging rms to formalize. Only enforcement, e.g. in the form of inspection visits, or payment of about one month of prots were found to signicantly increase registration rates. We suggest that encouraging regular tax ling among rms that are tax-registered but do not le (regularly) is a more cost-eective way of casting the tax net wider. As non-lers are rms that have chosen to

> 11Hallsworth (2014) refers to three other papers considering ling behavior, but all are focused on individual taxpayers.

6
register for taxes, their perceived benet from compliance (tax ling), likely exceeds that of fully informal rms that chose not to register. In addition, the tax authority already has the contact information and in some cases also third-party reports about the business activities of these rms, which can be leveraged to estimate outstanding tax liabilities and contact non-lers. In general, we extend this literature by considering an empirically important intermediate form of informality which has so far received little attention.

The rest of this paper is organized as follows. Section 2 describes the tax system and the mechanisms of third-party reporting in Costa Rica, and the data we use. Section 3 presents the experimental design. We discuss the results of the experiment in Section 4. Section 5 concludes.

# 2 Context and Data

## 2.1 Income and Sales Tax

Total tax revenues in Costa Rica represented 13.5% of GDP in 2014 (Oviedo et al. 2015). Sales tax revenues constitute the largest share (36%) of total revenues, followed by income tax revenues from corporations (16%) and income tax revenues from wage earners and self-employed individuals (10%) (CR Ministry of Finance 2015).<sup>12</sup> All rms in Costa Rica are subject to the income tax, and a subset of rms is subject to the sales tax. The income tax schedule depends on whether a rm is registered as a corporation or as an unincorporated rm, i.e. a self-employed individual. There are no size requirements for either rm type. Corporations face an average tax rate on prots of 10, 20 or 30%, depending on their revenue level. The self-employed face a marginal tax rate on prots between 0 and 25%, depending on their prot level. The self-employed thus have lower tax rates on average, and the self-employed below the exemption threshold can le an income tax declaration without incurring a liability. The vast majority of rms is required to le the income tax declaration by December 15 for the previous scal year (October 1 to September 30). A few large rms use the calendar year as scal year and le the annual declaration by March 15. Firms have to make three quarterly advance tax payments for the annual income tax if their previous year's liability or their average liability over the last

> 12Costa Rica's aggregate statistics do not distinguish between wage earners and un-incorporated rms, which are listed together as personas físicas. Our analysis focuses on rms.

7
three years is non-zero, with the maximum of these two amounts determining the level of advance payments.

Firms selling manufactured goods and certain service businesses, such as hotels and restaurants, are also liable for the monthly sales tax. The sales tax is eectively a VAT, with a recrediting mechanism for taxed inputs, but has a relatively narrow base that excludes most services (see Brockmeyer and Hernandez (2016) for details). Approximately 20% of income tax-liable rms are liable for the sales tax.

Instead of paying the regular income tax (and, where applicable, the sales tax), retailers in certain sectors and below certain size thresholds (i.e., those with annual purchases below 150 base salaries, net assets below 350 base salaries, or with less than six employees) can opt into a simplied regime. Under the simplied regime, a tax is levied on inputs at sector-specic rates that vary from 3% to 9.8%. Firms in this regime declare on a quarterly basis, and can claim credit for withholding by state institutions for the income tax, but not for withholding by credit card institutions for the sales tax. During the period we study, approximately 30,000 rms led their taxes under the simplied regime, while 360,000 rms led their income taxes under the regular regime. Firms can opt into or out of the simplied regime by submitting a D140 modication form, or deregister completely by submitting a D141 deregistration form.

Figure 1 shows the percentage of tax-registered rms that did not le a tax declaration in 2014 by rm and tax type. For the income tax, this share was 19% of corporations and 25% of the self-employed.<sup>13</sup> It is lower but still substantial for the sales tax19% for corporations and 14% for the self-employed. This proportion has been stable over the last ve years, and is based on a tax register that is updated on a regular basis. However, it is possible that the tax register contains inactive rms whose owners decided not to deregister, as deregistration requires a personal visit to the tax oce and the payment of any outstanding tax obligations. Even among rms covered by third-party information, i.e., shown to be economically active, 12% did not le their income tax for the 2014 tax year.

> 13The corresponding gures in Brockmeyer and Hernandez (2016) are comparable, albeit lower, as they use an algorithm based on tax declarations and registration/deregistration records to construct snapshots of the tax register at dierent points in time, but do not directly observe the tax register. The gures in this paper are the authority's own estimates based on all available data.

8
# 2.2 Third-Party Information

To enforce taxes, the Costa Rican tax authority makes use of third-party information from dierent sources. The relevant informative declarations, submitted by public or private sector agents about the economic activities of tax-liable rms and individuals, are explained below. An informant submits one informative declaration for each customer or provider, specifying their tax identication number, the transaction amount, the tax withheld (if applicable), and the income or transaction type (in general categories). Taxpayers are not provided with the informative declarations at the time they le their tax declaration, and they are not notied about the existence of an informative record. Given the structure of reporting requirements, rms should be aware of the existence of third-party reports about them, but rms with unsophisticated accounting systems might not be able to accurately estimate the amount of third-party reports.<sup>14</sup>

-  Firms have to report transactions with clients and suppliers (form D151) if the accumulated annual amount of transactions with a single transaction partner reaches CRC 2.5 million. The payment of rent, commissions, professional service fees, or interests must be reported if the annual transaction amount with a single transaction partner reaches CRC 50,000. These transactions must be reported by both the seller and the purchaser.<sup>15</sup> As compliance with this reporting requirement is considered to be incomplete, a rm may not know whether it has been reported by a client or supplier.

-  State institutions report all purchases from private rms (form D150). They also withhold tax at a rate of 2%, which is remitted to the tax authority as an advance payment on the income tax.<sup>16</sup> State institutions are considered to be highly compliant with their reporting obligation, so that a rm selling to a state entity can be relatively certain that the transaction will be reported to the tax authority.

>  Credit or debit card companies report all card sales by aliated businesses (form D153).

> 14In the case that a taxpayer inquires about the information held about her economic activities, the tax authority is legally obligated to provide the information.

> 15Similar to the D151 informative declaration, form D158 must be led by the organizers of agricultural auctions, and the declaration covers all sales and purchases at the auction. As this declaration covers very few taxpayers, we do not include it in our analysis.

> 16The D150 informative declaration is also led by a small number of rms purchasing certain specied services (e.g. transport, communications) from non-resident rms. Firms in this case withhold tax at a rate of 3% on the specied purchases. However, less than 1% of rms in the full sample of income tax returns are aected by this scheme, which we thus do not take into account in our analysis.

9
They also withhold tax at a rm-specic rate between 0% and 6%.<sup>17</sup> The withheld amount is remitted to the tax authority as advance payment on the sales tax. Card companies are also considered to be highly compliant with their reporting obligation, so that a rm can be relatively certain that its card-machine sales will be reported to the tax authority.

The ling deadline for third-party reports by rms and state institutions is the same as the ling deadline for the income tax, December 15. Credit and debit card reports are led monthly. The tax authority uses all informative declarations, combined with customs declarations on imports and exports, to automatically cross-check all income tax returns. Taxpayers with strong discrepancies between third-party information and the self-assessed tax declaration, and/or meeting other criteria<sup>18</sup> , are selected for partial audits or full audits.

Third-party reports, combined with the list of tax registered rms, are also used to identify nonlers, i.e. rms that have not complied with their ling obligations, for the income tax, the sales tax or third-party reports (reporting transactions with suppliers or clients). The tax authority uses dierent communication interventions, variably relying on emails, phone calls, or personal visits, to follow up with non-lers. However, given human resource constraints, the non-ler campaigns do not systematically cover all non-lers and all ling obligations each year.

# 2.3 Data

The data set used in this paper includes the anonymized income and sales tax returns for 2013-2015 for rms ling in Costa Rica, both corporations and self-employed. This amounts to about 360,000 income tax returns per year and 68,000 sales tax returns per month. The data allows us to measure compliance prior to the experiment (2013), estimate the eect of the experiment on ling for the scal year 2014, and estimate the medium term impact on ling in 2015. The data includes all line items from the tax declarations, and we match it with payment receipts, including advance payments and nal payments, to estimate payment compliance. Finally, we match the rms' declarations with third-party reports submitted by other rms, state institutions, and credit/debit card companies. These data identify sellers and purchasers, transaction types, transaction amounts, and tax withheld where applicable. About 72% of rms who led an income tax return in 2014 were reported by at least one client or supplier, 9% were reported by a credit or debit card company, and 6% by a state

> 17See Brockmeyer and Hernandez (2016) for details on this withholding scheme.

> 18Such as pertaining to specic sectors or reporting a prot rate substantially dierent from the sector specic rate.

10
institution.

# 3 Experiment Design

Our study design relies on a randomized communication experiment implemented by the tax authority in Costa Rica. Table 1 summarizes the experiment design. The target population included 115,000 rms that were registered with the tax authority, but had not led their income tax declaration for 2014 by February 15, 2015, two months after the regular ling deadline. Of these non-lers, the experiment targeted 49,757 rms that had an email address on le.<sup>19</sup> The experiment was divided into two sub-experiments, targeting rms that were covered by at least one third-party report from a client or supplier ( _N_ = 12 _,_ 515) , i.e. the rms that were reported to be economically active, and those that were not covered by any third-party report ( _N_ = 37 _,_ 242) . To determine which rms were covered by third-party information, the authority considered all reports by other rms, by state institutions, and by credit/debit card companies.<sup>20</sup>

## 3.1 Firms Covered by Third-Party Information

Firms covered by third-party information were randomly assigned to one of three groups: a control group and two treatment groups. The control group received no email message. Firms in the treatment group received an email from the tax authority, requesting it to le the income tax declaration for 2014, as shown in Figure A1 in the Appendix. The message content was similar to past communication campaigns. It emphasized that not ling taxes is a serious oense, and that oenders could be audited or subject to business closure, as stipulated in the law. Additionally, the message integrated ndings from behavioral design to strengthen the message impact, as studied by Hallsworth et al. (2014), BIT (2015), and Kettle et al. (2016). The message used shortened and simplied text (with legal details below the main body of the email), featured a clear call to action written in red capital lettersPlease le your income tax return in the next 10 days, provided

> 19Given the costs of sending letters as well as their slow and incomplete delivery, the tax authority contacts rms by post only in the context of audits, when a written announcement of the audit is required.

> 20A small number of rms in the study shared the same primary email address, either because they had a common owner or shared a common legal representative. For this reason, rms were grouped into clusters based on their primary email address and randomization took place at the cluster level. Throughout our analysis, we use standard errors that are robust to within-cluster correlation, and the results are robust to limiting the sample to clusters with only one rm (98% of clusters). The full experiment sample, including the SMS experiment described in the Appendix, contains 80,605 rms and 77,300 clusters. The mean number of rms per cluster is 1.04 and the median is 1.

11
a direct link the the tax form, and was personalized with the name of the addressee featuring in the address eld. The message also presented the social norm8 out of 10 [tax-registered] Costa Ricans have led their 2014 income tax returnand introduced the possibility of public shaming through the publication of names. The social norm and the deterrence content of the message are all fact-based and credible, given the usual enforcement activities the tax authority conducts through audits, rm closures, and the online publication of the list of late-lers (for the sales tax) and late-payers (for various taxes).<sup>21</sup> As the tax authority routinely uses third-party information in its enforcement activities and mentions this to taxpayers, the baseline treatment message (treatment 1) also stated that We have third-party information, conrming that you or your client performed activities in 2014 which require you to pay taxes.<sup>22</sup> Treatment 2 further strengthened this statement by providing rms with specic examples of third-party information held by the tax authority about their activities:

# Treatment 2 (T2):

We have third-party information conrming that you or your client performed activities in 2014 which require you to pay taxes. From third-party reports (D150, D151 and D153), we know about your operations, for example:

- Sales of at least XXX reported by COMPANY,

- Sales from credit/debit cards of at least ZZZ reported by BANK,

- Sales or contracts with state entities of at least WWW.

For each type of third-party information held by the tax authority (reports from other rms, state institutions, and credit/debit card companies), it listed the transaction amount and purchaser of the highest reported transaction. Providing evidence of third-party reported transactions and transaction partners clearly demonstrates the tax authority's possession of third-party reports and thus makes the message highly credible. In addition, providing examples rather than the total amount of third-party reported transactions, as in Carrillo, Pomeranz, and Singhal (2016), allows us to apply this treatment to small or marginally formal rms with very small third-party reports.

> 21As the message style and content used in past communication campaigns with non-lers varied from year to year, relied on a diverse set of communication methods (emails, SMS, phone calls, invitations for personal interview), and messages were not systematically sent to all late lers, we consider that a treatment eect compared to the control group cannot simply be due to sending a dierent message.

> 22This mention of your client is added to make the message suitable for being sent directly to the rm or the rm's legal representative.

12
Finally, the design of the treatment allows us to test whether rms over- or under-estimate the amount of information that the tax authority holds about them.

# 3.2 Firms Not Covered by Third-Party Information

As in the rst sub-experiment, rms not covered by third-party information were also assigned randomly to either a control group, which received no email, or one of two treatment groups. The treated groups received an email that was nearly identical to the email in the rst sub-experiment, as shown in Figure A2 in the Appendix. The only dierence is the paragraph on third-party information, which was either omitted entirely (treatment 1), or replaced by a weaker but true statement (treatment 2):

## Treatment 2 (T2):

The tax authority uses information from third-party returns (D150, D151 and D153) to identify economic activity and sources of income.

This treatment thus does not claim that the tax authority has third-party information about the taxpayer in question, but it may encourage compliance among rms who are uncertain about whether they have been reported by a supplier or client.

As the message content here diers slightly from sub-experiment 1, comparing treatment eects across sub-experiments confounds the dierence in treatment and the dierence in the target population, which may both generate dierent treatment eects. The most comparable treatments are the weaker message for rms covered by third-party information (T1) and the stronger message for rms not covered by third-party information (T2). We will return to this comparison in our analysis of how treatment eects dier for rms covered and not covered by third-party information.

# 3.3 Experiment Timing

The experiment took place between March and April 2015, as shown in 1. The list of non-lers was extracted on February 15, 2015, two-and-a-half weeks before any emails were sent to rms covered by third-party information and seven weeks before any emails were sent to rms not covered by thirdparty information. The emails were sent on specic dates. As emails were not sent automatically but manually by individual tax ocers in the regional tax authority, the interventions were sequenced 13
to accommodate the available human resources. Given the existing communication systems and data management procedures, it was not possible to update the list of non-lers at the start of each experiment. Some rms in the experiment sample had thus already led by the time the emails were sent. This allows us to demonstrate parallel trends in the treatment and control groups between the extraction of the list and the start date of the experiment. Moreover, the fact that emails are delivered instantly, as opposed to letters which vary in their delivery time, allows us to test whether treatment eects emerge sharply at the start of the experiment.

# 3.4 Balance of Randomization

To assess the internal validity of the experimental design, we examine the balance of treatment and control groups in terms of characteristics and compliance outcomes at baseline. Table 2 presents balance in terms of rm characteristics that are relevant to compliance behavior, and of which we include a subset as controls in our estimation. The characteristics include the rm type (corporation or self-employed), whether the rm has a legal representative, a secondary email address on le<sup>23</sup> , whether it is located in the capital city of San José, and the total transaction amount reported by third-parties. The latter is measured by indicators capturing whether the total amount of thirdparty reported sales for a given rm, as per the sum of reports by client companies, state institutions, and credit/debit card companies, is above CRC 2.5 million or above CRC 6 million. These cutos correspond to the priority group designations used by the tax authority in prior communication campaigns targeting non-compliant rms, when rms with larger third-party reports were more likely to be contacted.

In addition, as some regional tax oces deviated from the experiment design and contacted rms prior to the start of the experiment date through phone calls and emails (dierent from the experimental emails presented in the previous sections), we also consider whether the occurrence of such early communication is balanced across treatment groups. Finally, as we expect past tax compliance to be a predictor of future compliance, we also consider past compliance as measured by a series of dummy variables that capture whether the rm made any quarterly advance tax payments for 2014, and whether it led income tax, had a positive net liability, made a payment,

> 23When treated rms had two email addresses on le, the tax authority sent the same email to the two addresses. For experiment 1, all (and only) rms with a legal representative have a second email address on le; for experiment 2, we test whether the proportion of rms with two email addresses is balanced across control and treatment groups, and we control for second email addresses when we estimate treatment eects.

14
or submitted a third-party informative declaration (D151) about a client or supplier in 2013.

Table 2 covers experiment 1 in columns 1-4 and experiment 2 in columns 5-8. Column 1 (5) displays the average for the control group, columns 2 and 3 (5 and 7) show the dierence between the control group and treatment groups 1 and 2, respectively, and column 4 (8) reports p-values from a test of the hypothesis that the two treatment groups are jointly equal to the control group. All p-values exceed the 10% signicance cuto and for 40 out of 42 coecients, we fail to reject at the 10% level of signicance the hypothesis that the treatment group mean equals the control group mean. We thus conclude that the control and treatment groups in both experiments are well balanced.

In experiment 1, only 15% of rms are corporations, 61% use a legal representative and 35% and 18% respectively have medium or high amounts of third-party information. The experiment 2 sample features a 26% share of corporations, and a 66% share of rms using a legal representative. The fact that self-employed below the exemption threshold do not have to pay income tax, and may be unaware that they are nonetheless required to le a declaration, could explain the high share of self-employed compared to corporations in both experiments. Only 6% of rms in experiment 1 and 5% of rms in experiment 2 have a second email address on le. In both experiments, about 50% of rms are located in the capital city. As for past compliance, only 2% of rms in experiment 1 made advance payments for the income tax for 2014, 33% led income tax in 2013, and 5% made a payment in 2013. Past compliance rates are even lower among rms in experiment 2, as would be expected given that these rms are not covered by any third-party information. The rms who were contacted early mostly pertain to experiment 1, representing 12% of the sample, but are perfectly balanced across control and treatment groups.

Table 3 examines the balance of outcomes of interestincome tax compliance and other compliance outcomesmeasured on the day prior to the start of the rst email experiment (March 3, 2015). The fact that all declarations and payment receipts carry a time-stamp and indicate the corresponding scal period allows us to precisely capture compliance at dierent points in time. The structure of this table is identical to table 2. We nd that about 5% of rms in experiment 1 and 1% of rms in experiment 2 led their income tax declaration after the extraction of the non-ler list and before the start of the experiment. The share of rms reporting a positive net liability and making a payment is below 2% for experiment 1, and close to zero for experiment 2. Despite not ling their own tax declaration, 16% of rms in experiment 1 and 1% in experiment 15
2 presented a third-party declaration about a client or supplier. Compliance with the sales tax is also non-negligible, with an average number of sales tax declarations over the last twelve months of .6 in experiment 1 and .24 in experiment 2, despite the fact that only about 15% of these rms are liable for the sales tax. As would be expected given the short window between extraction of the non-lers list and the experiment start date, hardly any rms deregistered, deregistered from the sales tax or switched to the simplied tax regime in this period.

We can reject the hypothesis that the treatment group mean equals the control group mean in 38 out of 40 means tests in Table 3, and the p-values of the test jointly comparing the treatment groups to the control group exceeds the 10% signicance cuto in all cases. For the two variables for which we detect a statistically signicant dierence (positive net liability and deregistration, both in experiment 2), the means are extremely close to zero, so that the result is driven by a handful of rms. We thus conclude that the control and treatment groups are well balanced in terms of the relevant rm characteristics and outcomes measured prior to the start of the experiment. This validates a causal interpretation of the treatment eects, and allows for straightforward estimations.

# 4 Results

This section presents the results of our empirical analysis. First, we present the estimation strategy. Second, we present the results on income tax compliance, other compliance outcomes such as sales tax compliance and information reporting, and examine persistence of the eects in the medium term. Third, we discuss the heterogeneity of our results and potential mechanisms. Finally, we conclude with a cost-benet analysis.

## 4.1 Estimation

To estimate treatment eects on binary outcomes, such as income tax ling or making a payment, we use the probit specication: where _T_ 1 _i_ and _T_ 2 _i_ indicate treatment 1 and 2, respectively, for rm _i_ ; _Xi_ is a vector of covariates; and Φ is the cumulative distribution function of the standard normal distribution. The parameters _α_ , _β_ 1 , and _β_ 2 , and the parameter vector _γ_ are estimated using maximum likelihood. Our probit 16
estimates are very similar to ordinary least squares (OLS) estimates.

To estimate treatment eects on continuous outcomes, such as the payment amount, we use two specications. We rst use OLS to estimate the log-linear model where _yi_ is payment for rm _i_ , _εi_ is an error term, and _T_ 1 _i_ , _T_ 2 _i_ , and _Xi_ are dened as before. Second, we use iterated, reweighted least-squares (maximum quasi-likelihood) to estimate the Poisson pseudo-maximum likelihood (PPML) model: where _g_ ( _·_ ) is the natural log function, _yi ∼_ Poisson, and the other variables are dened as before. PPML has been shown to outperform OLS if the outcome variable has many zeros (Santos Silva and Tenreyro 2006). Nonetheless, our PPML estimates of the eect of treatment on payment are very similar to OLS estimates.

In all specications, we compute (Huber-White) standard errors that are robust to within-cluster correlation, as randomization was conducted by clusters of the primary email address.<sup>24</sup> For the probit and PPML specications, we report average partial eects of discrete changes from zero to one for binary independent variables, such as the treatment indicators, and compute the clustered standard errors using the delta method. In addition to testing the hypotheses that _β_ 1 and _β_ 2 are signicantly dierent from zero, we report the p-value from a (Wald) test of the hypothesis that _β_ 1 and _β_ 2 are equal.

We condition on a set of control variables, which include rm type (corporation), whether the rm has a legal representative, rm location, amount reported by third-parties, and the rm's previous compliance record (i.e. income tax ling and payment in the previous year). Each of these controls is dened as in the balance tests in Section 3.4 and measured prior to the start of the experiment.

> 24The results are also robust to conducting the estimation on the sample of one-rm clusters only.

17
# 4.2 Income Tax Compliance

We start by analyzing the impact of the emails on income tax compliance non-parametrically. Figure 2 shows the rate of income tax ling and payment over time by treatment status, with the start of the experiment indicated by a vertical line. The left (right) column refers to rms with (without) third-party information. While pre-intervention trends in the treatment and control groups were nearly identical for all outcomes, a positive treatment eect on ling and payment emerged sharply at the start of the experiment. This eect stabilized by about ve weeks after the experiment start date, and did not decrease thereafter.<sup>25</sup> This conrms that the emails generated additional tax payments rather than just bringing forward payments that rms would have made anyways. After 15 weeks of the intervention, the ling rate for information-covered rms reached 32.5% for those sent the baseline email, and 34.2% for those sent the email with examples of third-party information, relative to 11.5% for the control group.<sup>26</sup> The dierence between the two treatment eects is statistically signicant at the 10% level. The payment rate was 4.7% for those sent the baseline email, 5.3% for those sent the email with examples of third-party information, and 1.7% for the control group, though the dierence between the two treatment groups is not signicant.

For rms not covered by third-party information, the shape of the ling and payment response relative to the control group is similar, with the exception of any signicant dierence between the two treatments. Emphasizing the use of third-party information, in addition to highlighting deterrence measures, thus did not enhance compliance among rms not covered by an information trail, which suggests that these rms did not expect the tax authority to possess any third-party reports about them. After 15 weeks of the intervention, the proportion of treated rms ling an income tax declaration reached 19%, relative to 3.9% for the control group. The rate of payment among rms not covered by third-party information was below 1%, as most rms declare a net liability of zero, but the payment rate was still signicantly higher for the treatment group.

To consider a larger number of outcomes and control for covariates, we report probit, OLS, and PPML estimates in Tables 4 and 5 for the two sub-experiments. Table 4 presents estimates of the treatment eect at 15 weeks for rms covered by third-party information. The rst three columns report extensive-margin responses on income tax ling, reporting a positive net liability, and making

> 25This is true also when considering a longer post-intervention period (results available upon request).

> 26The fact that over 60% of the treatment group do not le in response to the (strong) enforcement message might partially be attributable to the fact that not all taxpayers received and opened the email. It is unfortunately not possible to identify the taxpayers who did not receive or open the email.

18
a payment. We estimate that the baseline email increased the probability of ling by 21.3 p.p., which is consistent with Figure 2. The eect of the information email, at 23.2 p.p., is signicantly greater than the baseline email. The two emails also increased the probability that a rm reported a positive net liability (by about 5 p.p.) and made a positive payment (by about 3.4 p.p.). Note that the payment rate is lower than the share of rms reporting a positive liability, as some rms make quarterly advance payments or are subject to withholding at amounts that fully cover their liability, and others under-pay or pay with delay. The fourth and fth columns show that the emails also increased the average payment amount, although this is driven by a greater number payers, not larger payments conditional on making a payment.<sup>27</sup> Using PPML, we estimate that the baseline email increased income tax payments by CRC 8,168 (US$ 15) per taxpayer, on average, while the information email increased payments by CRC 10,192 (US$ 19).<sup>28</sup> The information email had a larger impact on all outcomes than the baseline email, but the dierence is statistically signicant at conventional levels only for payment, where we observe the highest average and presumably the least noise among the dummy variable indicators.

Table 5 shows the analogous results for rms not covered by third-party information. Recall that, for these rms, the baseline treatment omitted any mention of third-party information, and the information treatment mentioned the general use of third-party information by the tax authority, without making specic reference to the email recipient (see Section 3). The emails increased the probability of income tax ling by 15 p.p.; they also increased the probability of reporting a positive net liability and of making a payment, but the magnitude of the eect is small0.6 p.p.compared with the eect on ling. The eect on the payment amount is statistically signicant but not economically large. The treatment increased payment by CRC 215 on average (US$ 0.39).

In sum, we nd that the emails signicantly improved income tax compliance by non-lers. For rms covered by third-party information, the eects of emails that listed specic examples of information known to the tax authority were generally higher. All treatment eects estimated here equal or exceed those from other communication experiments (Castro and Scartascini 2015; Del Carpio 2014; Fellner, Sausgruber, and Traxler 2013; Kettle et al. 2016), which suggests that combining dierent messages contents that have proved to be impactful individually (deterrence,

> 27Note that we consider payments made by the taxpayer with her annual declaration, and ignore the quarterly advance payments during the year. If a taxpayer is a non-ler and also has outstanding advance payments, those would have to be made with the annual declaration, and are thus considered in our estimation.

> 28We winsorize payment amounts at the top 0.1% of the unconditional payment distribution to reduce the inuence of outliers.

19
use of third-party information, behavioral design) can generate a larger impact overall.

# 4.3 Other Compliance Outcomes

As the experiment had a strong impact on the targeted compliance outcomes, notably income tax ling and payment, it is appropriate to consider also spillovers on other compliance outcomes. Indeed, taxpayers might perceive the intervention as a general increase in enforcement, and improve compliance also with other tax ling and payment obligations. Alternatively, they might perceive the intervention as pertaining to income tax compliance only, and increase compliance with the targeted tax but compensate for lost income by reducing compliance with another obligation towards the government. To shed light at this, we use rich administrative data on rm's ling of informative declarations, sales tax declarations, sales tax payment, deregistration, and switches to the simplied regime<sup>29</sup> , all of these representing compliance outcomes which were not directly targeted by the intervention. We also consider income tax compliance in 2013, which may be positively or negatively aected by the intervention (targeting non-lers for 2014), as a non-negligible share of rms le (or pay) their taxes with substantial delay (see Brockmeyer and Hernandez (2016) for details), and 80% of non-lers for 2014 were also non-lers in 2013. This is to our knowledge the rst study to examine the impact of enforcement on such a large variety of compliance measures.

Table 6 shows the treatment impact on the above-mentioned outcomes, for experiment 1 in Panel A and experiment 2 in Panel B. Columns 1-3 in Panel A show that treated rms were marginally more likely to le an information report (D151) about their supplier, and signicantly more likely to le an information report about their client.<sup>30</sup> With a 4.8 p.p. increase over a control group average of 12.8%, the eect is twice as large for the information treatment as for the baseline treatment, and the two coecients are statistically distinguishable at the 5% condence level. The observed impact can be explained by the fact that, for rms ling an income tax declaration, ling an informative declaration generates only a small hustle cost, but no monetary cost, and prevents a possible ne for non-compliance with the reporting obligation. Consistent with this, 53% of non-lers that led a third-party report have also led their own income tax declaration. As the emails with additional third-party information made the existence of third-party reports salient and provided information

> 29Firms can opt into simplied income or sales tax regimes if they meet certain criteria, such as expenditure or employment thresholds. To do this, they must submit a modication form to the tax authority.

> 30We do not consider other information reports, such as the D150 and D153 reports, as those cannot be led by rms.

20
about the nature of these reports, it is not surprising that this treatment had a signicantly larger impact on reporting compliance than the baseline treatment. About 25% of the newly generated information reports concern transactions that were not previously known to the authority while 75% conrm transactions that had already been reported by the other transaction partner (the client in most cases). The impact on information reporting of clients is also present and signicant, though smaller in magnitude, among rms not covered by third-party information. For both samples, we conrm in the bottom panels of Figure 2 that the pre-intervention trends in treatment and control groups were similar, and the eect emerged sharply at the time the intervention started. A targeted (income tax) enforcement intervention thus led to a signicant expansion of the tax authority's information set for future tax enforcement, of the income tax and other taxes.

Columns 4-6 show that the intervention had no signicant impact on sales tax compliance, which is the most important tax paid by rms. However, given the small share of rms (especially among unincorporated rms) that are liable for the sales tax, it is dicult to detect any signicant change in compliance with the sample size at hand.

Columns 7-9 show that the emails increased rms' likelihood of deregistering with the tax authority. This is consistent with the fact that deregistration generates a hustle cost (visiting the tax oce<sup>31</sup> ), and there are eectively no nes for remaining registered but economically inactive, so that rms are unlikely to voluntarily deregister when ceasing activities. For rms with third-party information, treatment increased the deregistration rate from 0.9% to about 2%, and coverage by particularly large amounts of third-party information was reassuringly negatively correlated with deregistration. For rms not covered by third-party information, treatment increased the deregistration rate from 1.2% to about 3%. Firms not covered by third-party information were also marginally more likely to deregister only from the sales tax (rather than from all tax obligations) or switch to the simplied tax regime which is available to rms below certain size thresholds in specic sectors (see Section 2), but this concerns less than 0.5% of the sample. The smaller eect on information-covered rms is consistent with these rms' reported economic activity in the scal year in question (although they could have seized activities during the year).

When considering the rms that deregistered and those who did not, pooling the two experiments, it appears that the deregistrants were rms that strive to be compliant on paper, without

> 31The possibility for online deregistration was abolished as rms exploited it to register with the aim of obtaining a book of ocial receipts, only to deregister immediately afterwards, as reported by the tax authority.

21
transferring any revenue to the tax authority. Among deregistrants, 61% led an income tax declaration for 2014 and 52% did so for 2013, versus 21% and 26%, respectively, for rms that remained in the tax register. Yet the mean reported liability was orders of magnitude lower for deregistrants compared with rms remaining in the tax registerCRC 826,620 versus CRC 5,100 in 2014, and CRC 656,409 versus CRC 40,101 in 2013. While some deregistrants continued their business activities informally (8.2% or 103 rms were third-party reported as suppliers in 2015), they would have been unlikely to pay more taxes in the current enforcement environment. It thus appears that the deregistrations reduced the number of taxpayers to be managed by the administration, but did not signicantly aect tax collection.

Finally, columns 10-11 show that the emails improved compliance for the previous tax year, by signicantly increasing the probability of (late) ling and payment for the previous tax year, 2013. This is true even though the emails specically mentioned the requirement to le the 2014 income tax return. Emails to information-covered rms increased rm's likelihood of ling an income tax declaration by 2-3 p.p., compared to the control group's average of 35.0%. The impact on rms no covered by third-party information was even largerabout 5 p.p. compared to the control group's average of 18.9%. In both samples, treated rms were slightly more likely to make a payment for the income tax in 2013, but the increase was economically small (below 0.5%).

In sum, our analysis of a diverse set of compliance outcomes that could potentially be impacted by the enforcement intervention detects positive treatment eects on compliance with third-party reporting and past income tax obligations, and a small increase in deregistration rates, mostly reecting the exit of rms with disproportionally low reported liabilities.

# 4.4 Persistence of Eects

Having shown that the treatment had an economically large impact on contemporaneous income tax compliance and other compliance outcomes, we now examine whether these eects persisted over time without a follow-up communication.<sup>32</sup> Table 7 shows the impact on compliance outcomes and third-party reports in 2015, one year after the treatment. For compliance outcomes (columns 1-3 and 7-9), we pool the two treatments for simplicity, as the coecients do not dier signicantly by treatment. For rms covered by third-party information, the email messages increased the income

> 32The tax authority conducts other communication campaigns for the ling of sales tax and informative declarations, and it is possible that rms in our experiment were contacted through one of these campaigns, but the targeting would have been orthogonal to our treatment group assignment.

22
tax ling rate one year later by 6.5 p.p., over a control group average of 35.1%. The eect was even larger7.3 p.p. or 46%for rms not covered by third-party information, which received a presumably weaker email message in the treatment year. The emails also had a statistically signicant but economically small eect on payment rates one year later: 1.0 p.p. for rms with third-party information and 0.2 p.p. for rms without information. Finally, treated rms were more likely to le informative declarations in 2015, mostly to report a client. For information-covered rms, the emails generated a 2.3 p.p. increase in the third-party reporting rate, thus further expanding the tax authority's enforcement capacity.

Conversely, we do not detect any eect of the emails on rms' propensity to be the subject of third-party reports in a later year. Columns 4-5 in Table 7 display the eect of the two treatments on rms' likelihood of being reported by state institutions (D150), private sector clients or suppliers (D151), or card processing companies (D153) in 2015. Treated rms were no more or less likely to be the subject of these reports, even if they received the stronger information email, which provided them with examples of third-party information held by the tax authority. The result holds also when pooling the two treatments. Thus, the treatment thus does not seem to have distorted production networks by encouraging rms to reduce trade with state agencies or credit/debit card machine usage, or to change trading practices with other rms in an eort to avoid being covered by third-party reports.<sup>33</sup> Overall, these ndings suggest that one-time deterrence messages can have a signicant and positive impact on compliance in the medium term, including compliance with information reporting requirements. The strong medium-term eects in our experiment suggest that the email messages lead rms to update their beliefs regarding the tax authority's enforcement capacity, i.e. the capacity to identify and follow up on non-lers, and that the update was persistent over time, hence conrming the messages' credibility.<sup>34</sup> The emails thus did not just act as a reminder or nudge, nor as a temporary, yet ultimately empty, enforcement threat.

The positive treatment eect in the medium term also sheds some light on the size of potential real eects. By reducing (compliant) rms' after-tax protability, the treatment might have lowered

> 33We also examine potential compliance spillovers of treatment on rms' trading partners, as identied by the D151 information reports from clients and suppliers, but do not nd any spillover eects.

> 34It is possible that the treatment and subsequent consultations with tax ocers allowed rms to gain new information about the tax ling procedure, which would have reduced the cost of future tax ling. However, we consider this mechanism to be less important than the deterrence mechanism, as tax ling in Costa Rica is very simple, all the necessary information is available online, and rms in our sample are tax registered and have thus been in contact with the tax authority at some point, often through ling a previous income tax declaration.

23
investment and rm growth. However, the persistent treatment eect on compliance shows that the (positive) eect on income reporting is larger than the (potentially negative) eect on true income.<sup>35</sup>

# 4.5 Heterogeneity

Although the emails can be sent at a marginal cost of zero, communications campaigns such as the one analyzed here still generate non-negligible costs to the tax authority (more on cost-eectiveness below) as emails have to be personalized manually or an algorithm needs to be constructed for this task, and the communications generate information and advice requests from targeted taxpayers to tax ocials. Ocials report that responding to these inquiries constitutes the most important cost of communication campaigns. Given human resource constraints, it is thus important to understand which taxpayers are most likely to respond to the treatment and target the intervention accordingly. This section considers heterogeneity in treatment eects by coverage of third-party information, and by other rm characteristics, distinguishing the two main outcomes of income tax ling and payment.

## 4.5.1 By Third-Party Information

It is ex ante ambiguous whether coverage by third-party information or having larger amounts of third-party information would be associated with larger treatment eects. The information could interact with the intervention to strengthen its eect. Alternatively, rms that are covered by third-party information may be more likely to comply even without a treatment, and thus less likely to respond to the intervention. We start by considering heterogeneous treatment eects by information coverage, and then examine heterogeneity by the amount of information within the sample of information-covered rms.

To compare treatment eects across the two sub-experiments for rms with and without thirdparty information, we focus on the most comparable treatments. These are the baseline email for rms covered by third-party information, which emphasized the presence of third-party information about the rm in question without providing specic examples, and the second email for rms that are not covered, which mentioned the general use of third-party information by the authority. The latter message was thus weaker, but delivered the strongest message on third-party information that the authority can credibly send to rms in this sample. While Figure 2 and Tables 4 and 5

> 35It is also conceivable that the real eect is positive, for instance if better tax compliance allows rms to trade with more formalized and more productive rms (though this requires assuming that non-lers were not prot maximizing).

24
show that the percentage point increase in the rate of income tax ling is greater for rms covered by third-party information (21 p.p.) than for rms not covered (15 p.p.), the proportional eect is greater for rms not covered by third-party information. Their treatment group ling rate is 380% greater than the control group, compared with 180% for information-covered rms. The same qualitative dierence between the percentage point increase and the proportional eect holds when considering treatment impact on the rate of payment, the payment amount, and the rate of deregistration. Only the response in terms of information reporting is proportionally larger for information-covered rms. The large proportional eects among rms not covered by a paper trail are somewhat surprising, but can be explained by the low baseline (and control group) compliance rates.<sup>36</sup> Regardless, policymakers striving to increase revenue should target information-covered rms rst, as their absolute payment response is an order of magnitude larger than the response among non-covered rms.

Zooming in on rms covered by third-party information, Table 8 shows that treatment eect heterogeneity with respect to the extent of information coverage is also complex. The ling rate responds less strongly to the treatment for rms with larger amounts of third-party reported sales (columns 1-3), but these rms' payment rate responds more strongly, at least to the information treatment (5-7). The number of dierent third-party reports is associated with a larger treatment eect for both outcomes (columns 4 and 8).

To ascertain that the heterogeneity by third-party reported sales is not driven by a particular cuto choice, we also report the compliance outcomes by deciles of third-party information in Figure 3. The results are similar when using deciles of the maximum of self-reported sales in year _t −_ 1 (or the most recent year available) and third-party reported sales in _t._ The exercise is thus equivalent to examining treatment eects by rm size as measured in sales.<sup>37</sup> We nd that the treatment eect on ling is driven by seemingly smaller rms, with larger rms being signicantly more likely to declare even when in the control group, whereas the treatment eect on payment is driven by

> 36The fact that baseline compliance is higher among information-covered rms but the proportional treatment eects are larger among rms not covered by third-party information suggests that enforcement and third-party information are substitutes when it comes to tax compliance at the extensive margin. This contrasts with the nding by Almunia and Lopez-Rodriguez (2015) that information trails and monitoring eort are complements, although they focus on rm bunching below revenue thresholdsan intensive-margin response.

> 37We can also estimate rm size for rms without third-party information, taking reported sales from the most recent available income tax declaration, but this measure is available only for a subset of rms and is more noisy, as many rms have not led for several consecutive years. This, combined with the smaller absolute treatment eects in the sample of rms without third-party information makes it dicult to examine treatment heterogeneity among these rms.

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larger rms. This is consistent with the fact smaller rms, especially the self-employed, may declare without making a payment (due to being below the exemption threshold or deducting suciently high advance payments or tax withheld), and large rms are more likely to incur a positive tax liability. The intervention thus enhanced compliance along the rm-size distribution, but derived its revenue eect from larger rms.<sup>38</sup>

## 4.5.2 By Other Firm Characteristics

Other rm characteristics along which the treatment eect may vary include rm type, as corporations and the self-employed are taxed under dierent tax schedules, location in the capital city, and past compliance record. Table 9 considers heterogeneity along these lines for rms with third-party information in Panel A and for rms without such information in Panel B. Unsurprisingly, given the lack of an exemption in their tax schedule, the ling rate of corporations compared to the selfemployed responds less strongly but their payment rate responds more strongly to the treatment (columns 1 and 6). There is no heterogeneity in treatment eect along this line on the likelihood of ling by rms without third-party information (Panel A, column 1). Firm location in the capital city is associated with a marginally stronger treatment eect in only one out of the four estimations (columns 2 and 7). Past compliance in the form of ling and payment of the income tax in 2013, and ling of sales tax, strongly predicts a larger treatment eect, as would be expected. This is the case for both compliance outcomes and both sub-samples (with the exception of sales tax compliance which is negatively correlated with the treatment eect on ling among information-covered rms). When targeting their intervention, it is thus advisable for the tax authority to take into account a rm's degree of third-party information coverage, its rm type, and its past compliance record.

# 4.6 Mechanisms

Before concluding our study, it is appropriate to examine the mechanisms of the large treatment eects on tax payment for rms covered by third-party information. Treatment more than doubled the rate of payment and approximately doubled the amount of payment, with larger eects for the information treatment. These large eects contrast with other studies using third-party information to enhance compliance on the intensive margin. These studies nd that rms respond to an increase

> 38With the caveat of low precision, we nd that the eect of the treatment on submitting an informative declaration does not dier by rm size (the likelihood of complying on this margin increases with rms size for both the treatment and control group), and the treatment eect on deregistration is concentrated among smaller rms.

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in third-party reported sales by increasing both their sales and costs, thus minimizing any increase in reported prots and taxes paid (Carrillo, Pomeranz, and Singhal, 2016 and Slemrod et al. 2015). The challenge in our study is that treatment both increased the ling rate and potentially altered reported liabilities conditional on ling.

We start by comparing third-party reported sales, self-reported sales, and self-reported costs nonparametrically, as in Carrillo, Pomeranz, and Singhal (2016). Figure 4 shows that self-reported sales increase less than one-for-one with third-party reported sales (Panel A), although self-reported sales are on average about 30% higher than third-party reported sales. It thus does not seem to be the case that rms under-estimate third-party reports and match reported sales to an amount lower than true third-party reports. This result supports the use of examples rather than amounts of third-party information in the information treatment. However, the average rm matches declared sales very closely with declared costs (Panel B). Controlling for covariates, Table 10 shows the impact of the two treatments on declared sales, costs, and prots, measuring these variables with an indicator for positive amounts, an indicator for amounts larger than third-party reports, or in logs (in absolute amounts for prots as these can be negative). The results are tentative, but suggest that the information treatment generated a signicantly larger increase in reported sales than the baseline treatment (columns 1-3), but only a marginally larger increase in reported costs (columns 4-6). Firms receiving the information treatment thus increased reported sales by more than other treated rms, and did not fully oset this through cost increases. As a result, the likelihood of reporting a positive prot was signicantly higher among rms receiving the information treatment than among rms receiving the baseline treatment (column 7). While this evidence remains suggestive, it is consistent with the possibility that the information treatment generated an improvement in rm reporting behavior conditional on income tax ling.<sup>39</sup>

# 4.7 Cost-Benet Analysis

We conclude with a cost-benet analysis, considering the cost of the intervention and the increase in tax revenue it generates. The primary cost to the tax authority is the human resource cost of sending the personalized emails and responding to taxpayer inquiries. The authority reports that the sending of the emails was executed in seven and a half days by 32 tax ocers, paid at about

> 39 Results are similar when conditioning on ling, with the obvious caveat that the comparison across treatments is then no longer experimental.

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CRC 36,700 a day.<sup>40</sup> We assume that each ocers spent at most an additional ve days answering taxpayes' inquiries. This generates a total cost of CRC 14.7 million (US$ 27,000). To draw the most conservative conclusion possible, we take this cost into account, although other studies implicitly assume that the opportunity cost of time for the tax ocers is zero.<sup>41</sup> The direct benets are measured by the increase in tax payment from treated rms. Among rms covered by third-party information, the baseline email increased rms' income tax payments by CRC 8,168 (US$ 15), on average, 15 weeks after the start of the experiment, while an email that lists specic examples of information known to the tax authority increased payment by CRC 10,192 (US$ 19). The eect on payment at 15 weeks was smaller for rms not covered by third-party information, for whom the email increases payment by CRC 215 (US$ 0.39). In total, we estimate that the emails increased income tax revenue by CRC 82.2 million, or US$ 151,000. Of this amount, CRC 76.9 million came from emails sent to information-covered rms. Sending the strongest email, which listed specic examples of third-party information, to all information-covered rms, would have generated an additional CRC 50.7 million, or US$ 93,000 in revenue. We do not include in our calculation the impact on income tax payment for prior or future years, as we can detect a statistically signicant eect only on the propensity to make a payment for these periods, but do nd a statistically signicant point estimate for the payment amount increase.

Although the additional revenue generated by the experiment constitutes less than .1% of total income tax revenue, the intervention was highly cost-eective, with a cost-benet ratio of about 1:5<sup>42</sup> , and serves the broader purpose of sustaining voluntary compliance by detecting and following up on non-compliers. As we have shown, the intervention had positive indirect eects in terms of enhancing compliance with information reporting requirements, which facilitate future tax enforcement, and in terms of better medium term compliance for treated rms that update their beliefs about tax enforcement. These eects could potentially generate compliance spillovers on non-treated rms.

Beyond revenue considerations, the intervention improves horizontal equity of taxation by enhancing compliance among relatively small rms, and could thus improve tax morale and the per-

> 40Fixed cost already incurred include the cost of maintaining the taxpayer and third-party reporting database.

> 41We further assume that the administrative costs of ling for taxpayers are small, which is appropriate given the simplicity of the tax code and the online ling system.

> 42It is not necessarily the case that the intervention is less cost-eective for rms without third-party information, as the latter sample yields a smaller return, but also generates a lower administrative cost in terms of taxpayer inquiries. Unfortunately, breaking down the administrative cost into the cost for each intervention is not possible.

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ception of fairness of the tax system. In addition, the new information generated through rms' self reports and third-party reports give the government a broader view of the economy and hence a better basis for policy design.

# 5 Conclusion

This paper has argued that non-ling among tax registered rms constitutes an important and under-researched compliance gap in low income countries, that can be addressed cost-eectively. In Costa Rica, approximately 25% of tax registered rms do not le their income tax declaration in a given year, and this share is similar in other countries in the Latin America region. We evaluate a nation-wide communication campaign in which the tax authority in Costa Rica requested non-ling rms by email to le their income tax declaration. The emails featured strong but credible deterrence messages, integrated behavioral insights and leveraged third-party reports about taxpayers' business activities. We nd that the emails tripled the ling rate and doubled the payment rate among previous non-lerstreatment eects that are substantially larger than those found in much of the existing literature, and that further increase when emails specically mention examples of third-party reported sales. The return on an email was US$ 19 for rms covered by third-party information, but only US$ .39 for rms not covered by third-party information.

We extend the literature on communication interventions to reduce compliance gaps by considering a large variety of outcomes, all measured through rm-level administrative tax records. We show that the emails generated no negative spillovers on sales tax compliance. They slightly increased the deregistration rate, but they also increased the likelihood of ling third-party reports about clients or suppliers, and income tax ling in the year prior to and following the year of the intervention. This nding of a persistent treatment eect, which applies to income tax ling and payment and the ling of third-party reports, suggests that the intervention permanently raised rms' perceived enforcement probability and hence their compliance level.

Although the intervention increased total tax revenue by less than a fraction of a percent, the intervention was highly cost-eective and can thus be seen as a simple and sustainable way to widen the tax net. It may also generate positive compliance spillovers in the future, through the increased availability of third-party reports on rms' business activities. Whether the tax authority should allocate human resources to this intervention, or to audits, desk audits or follow-up on late-payers 29
depends of course on the elasticity of revenue to these dierent enforcement activities (Keen and Slemrod 2016).

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