Clearing the bar : improving tax compliance for small firms through target setting

Author / Creator

Al-Karablieh, Yazan, author

Available as

Online

Summary

We use a new dataset consisting of the universe of Greek corporate tax returns matched to financial statements to study a voluntary tax compliance program for small firms. This "self-assessment" pr...

We use a new dataset consisting of the universe of Greek corporate tax returns matched to financial statements to study a voluntary tax compliance program for small firms. This "self-assessment" program prescribed target taxable profit margins for different types of activity. Firms that reported profit margins above these targets in a given year were exempt from audits in that year. We find that the firms that take-up the program report significantly larger taxable profits than non-eligible firms, with some evidence of longer-lasting effects on tax reporting. Taxable profits increase by up to 70% of their pre-program levels. We also find that firms can easily and substantially manipulate reported revenue (decreasing it by up to 40%) to help meet prescribed profit margins. Overall, the program increased tax revenues collected from small firms, but points to a very large level of baseline under-reporting of profits and showcases the ease of manipulating reported revenues.

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