Tax Audits as Scarecrows
- American Economic Journal: Economic Policy (Forthcoming)
The canonical model of Allingham and Sandmo (1972) predicts that firms evade taxes by
optimally trading off between the costs and benefits of evasion. However, there is no direct
evidence that firms react to audits in this way. We conducted a large-scale field experiment in
collaboration with a tax authority to address this question. We sent letters to 20,440 small- and
medium-sized firms that collectively paid more than 200 million dollars in taxes per year.
We find that providing information about audits significantly affected tax compliance but in
a manner that was inconsistent with Allingham and Sandmo (1972).
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