At a time when fuel price hikes are stirring up continual debates, a paper to read can be ‘Tax Credits Response to Tax Enforcement: Evidence from a Quasi-Experiment in Chile,’ by Claudio A. Agostini and A. Claudia Martínez. More importantly, it can be reassuring for our tax officials to learn from the paper how a letter from the Chilean IRS could bring forth noteworthy results in terms of reduction in the tax credits claimed.

The not-so-uncommon story in the experiment is about the differential diesel tax treatment in Chile, which creates incentives for firms to use “tax exempted” diesel in activities requiring “non tax exempted” diesel. This might be particularly easy to do for multi-products firms using diesel for several activities, allowing them to evade diesel taxes by claiming a larger tax credit than the legally allowed, the authors inform.

In an attempt to reduce potential evasion of diesel taxes and improve tax enforcement, the Chilean IRS sent a letter to some firms asking to voluntarily report more details of every diesel transaction during the last year, the paper recounts. The impact of the letter was a significant reduction in the amount of tax credits claimed by firms; “on average, treated firms reduce their tax credits claims by around 16 per cent after receiving the letter.”

The authors find that the results are consistent with other results in the literature (Fellner et al.) showing that just receiving a letter from the IRS has an impact on tax compliance because it causes a substantial increase in the perceived detection risk. The results show that the IRS in Chile can successfully reduce diesel tax evasion by affecting firms’ perceived cost on non-compliance, the authors emphasise. “It would be important to consider in future research what happens in the long run. It could be possible that future letters would not have the same effect or even that the effect of the letter fades out in time and firms go back to the over-reporting practice.”

Instructive study about taxpayer behaviour.

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