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Reducing Evasion Through Self-Reporting: Theory and Evidence from Charitable Contributions

Tazhitdinova, Alisa (2015): Reducing Evasion Through Self-Reporting: Theory and Evidence from Charitable Contributions.

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Abstract

Using a quasi-experimental design, I show that self-reported information requirements are effective at reducing evasion. I use a reform that simplified the reporting rules for tax deductions of noncash charitable contributions in the U.S. to show that weaker reporting requirements led to a large increase in the reported donations but that nearly 50% of these donations were untruthful. At the same time, individuals experienced a substantial reduction in their reporting costs, an average of $82 per person. Next, I provide a theoretical framework that accounts for the observed trade-off between evasion and compliance costs to determine the optimal information requirements. I show that reporting should only be imposed on individuals with reported donations above a pre-specified threshold and that the threshold is primarily governed by the type and magnitude of cheating. Model calibrations in the case of noncash charitable donation deductions show that an optimally chosen threshold would reduce the welfare loss due to compliance and evasion by 70%.

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