Attacking Tax Evasion in Production Networks: Theory and Evidence from Paraguay

Our project will combine new theory and an RCT in Paraguay to provide new in-sights into tax evasion by firms and how policymakers can respond to reduce evasion. We extend the canonical model of tax evasion in two ways. First, we model firms re-porting transactions with their trading partners, creating reporting spillovers through production networks. Second, we consider two types of tax reporting equilibria: Uni-lateral reporting and collusive reporting, and derive optimal enforcement targeting rules under both. The experiment combines two sets of treatments in a factorial de-sign. First, treated firms are assigned to one of three groups: I) An Electronic Billing Machine (EBM) linked to the tax administration; II) Desk audit; or III) Both EBM and audit. Second, clusters of firms are assigned to one of three targeting rules: A) Status quo: risk-rated targeting; B) Optimal targeting under unilateral evasion; and C) Optimal targeting under collusive evasion.