A Note on Enforcement Spending and VAT Revenues

2001. Review of Economics and Statistics. Volume 83, Issue 2. https://doi.org/10.1162/rest.2001.83.2.384

Claudio Raddatz K, Alexander Galetovic, Eduardo M. R. A. Engel

Abstract:

Tax compliance studies usually focus on the effect of enforce-ment spending on tax evasion. Reliable estimates are difficult to obtain because evasion data are often suspect. This note shows how tax revenues can be used instead of evasion data to estimate the impact of changes in enforcement spending. Applying our method to Chilean data, we find that $1 (USD) of additional enforcement spending increases VAT revenues by $31. Moreover, current levels of spending could increase by 40% and still be within sample values. Hence, a 10% increase in spending could reduce evasion from its current rate of 23% to 20%.

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