Estimate of bunching at the disclosed Sector Study threshold
June 1, 2021
with E. Di Gregorio and E. Sartori
We show that tax authorities can stimulate tax compliance by strategically releasing audit-relevant information. We rely on the Sector Studies, an Italian policy disclosing to small firms and the self-employed that audit risk drops above file-specific revenue thresholds. This allows us to pursue two empirical strategies, leveraging more than 26 million Sector Study files submitted between 2007 and 2016. First, we estimate a structural model to match the heterogeneous bunching we observe on the low-risk side of the disclosed thresholds. Relative to scenarios where these thresholds are secret, we determine that disclosure results on average in 6.3-7.7% higher declared revenues, but modest welfare costs. Second, we exploit a staggered Sector Studies reform that widens the initial audit risk discontinuity. In line with our theory, taxpayers who benefit from greater audit exemptions above the threshold tend to reduce their relative compliance, while those originally below the threshold improve it. However, mean reported profits increase by 16.2% in treated sectors over six years.