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1999 Documento de Trabajo #52

A Note on Enforcement Spending and Vat Revenues

Estimating the impact of changes in enforcement spending is of interest to tax authorities and policymakers. The literature on tax compliance usually focuses on the effect that these changes have on tax evasion, whish makes it difficult to obtain reliable estimates, since evasion data are often suspect, particularly so in developing countries. This note show how, in the case of the Value Added Tax, tax revenues can be used instead of evasion data to estimate the impact of changes in enforcement spending. Applying our approach with aggregate Chilean data from 1981 to 1997 we find that that $1 of additional enforcement spending increases VAT revenues by $31. Moreover , current levels of spending could increase by 40% and still be within sample values, which implies that a 10% increase in enforcement spending may be expected to reduce evasion from its current rate of 23% to 20%.

Eduardo Engel
Alexander Galetovic
Claudio Raddatz

Publicado en: Review of Economics and Statistics, Vol. 83, 384-387, Mayo 2001.

Keywords: Chile., Enforcement spending, tax compliance, tax evasion, value-added tax