Weekly Economics Seminar by Bhanu Gupta
February 6 @ 1:30 pm - 2:40 pm
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Title: Third-Party Audit and Tax Compliance – Evidence from a Notched Policy in India
Speaker: Bhanu Gupta, Ph.D. Candidate, University of Michigan
Abstract: Can resource-constrained tax administrations rely on third-party auditors to overcome conflict of interest and increase compliance? We evaluate a notched policy in India which mandates firms to undergo third-party audit if their reported revenue is above a threshold. We argue that static bunching estimates can be biased in a dynamic setting where firms optimize over several time-periods. Using sample of administrative data, we develop a novel empirical framework to assess the impact of a notched policy on variables other than the running variable. The difference-in-differences estimates suggest that firms remit 20 percent higher taxes and report 16 percent higher taxable income once they are subject to third-party audit. The audit effect is heterogeneous, with firms paying higher taxes if they generate a substantial paper trail or employ fewer workers. Finally, extending third-party audit to smaller firms can be cost-effective and substantially increase government revenue.