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Firms' Responses to Tax Enforcement Strategies: Evidence from Spain

Almunia, Miguel and Lopez-Rodriguez, David (2013): Firms' Responses to Tax Enforcement Strategies: Evidence from Spain.

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Abstract

We study the effects of tax enforcement policies on firm behavior in Spain. Firms with more than €6 million in reported revenue are monitored by the Large Taxpayers’ Unit (LTU), which results in more frequent tax audits and more information requirements for those firms. We exploit this discontinuity in tax enforcement intensity to estimate the impact of different enforcement regimes on firms’ reporting behavior, using financial statements from almost the universe of Spanish firms for the period 1999-2007. An excess mass of firms locates, or “bunches”, just below the revenue threshold. Using bunching estimation techniques, we calculate that the marginal firm reduces its reported revenue by up to 7.5% to avoid falling in the high enforcement regime. A dynamic analysis shows that firm’s revenue growth rates decline substantially as firms approach the LTU threshold from below. We provide suggestive evidence that firms locating below the threshold also misreport their material and labor input costs to evade taxes.

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