Tax credits response to tax enforcement: evidence from a quasi-experiment in Chile

Produced by: 
Universidad Adolfo Ibañez
Available from: 
January 2012
Paper author(s): 
Claudio A. Agostini (Universidad Adolfo Ibañez)
Claudia Martínez A. (Universidad de Chile)
Fiscal Policy, Public and Welfare Economics

Diesel in Chile receives a different tax treatment depending on its use. If diesel is used in industrial activities the diesel taxes paid can be fully used as a credit against VAT, but if it is used in freight or public transportation (basically trucks and buses) only a fraction of diesel taxes paid can be used as a credit against VAT. As a result of this different tax treatment firms have incentives to use “tax exempted” diesel in activities requiring “non tax exempted” diesel. This tax wedge therefore generates and opportunity for tax evasion. In this paper we analyze the impact of a tax enforcement program implemented by the Chilean IRS, where letters requiring information about diesel tax credits were sent to around 200 firms in 2003. Using different empirical strategies to consider the non-randomness of the selection of firms, we find that firms receiving a letter decreased their diesel tax credits by around 11%.


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