The document explores the relationship between tax compliance and the use of ICTs in Ethiopia, investigating whether investments in tax administration can enhance tax-to-GDP ratios through improved enforcement and information availability. It critiques previous studies for their limitations and proposes a comprehensive study that extends existing research by analyzing income tax reporting changes post the introduction of electronic sales registration machines. Through a randomized control experiment, the authors aim to validate that these machines enhance compliance and assess potential shifts in tax evasion practices.

1. Hide and Seek: Taxpayers responses to increased
enforcement through ICTs
Evidence from Natural and Field Experiments in
Ethiopia
Andualem Mengistu 1 Giulia Mascagni 2 Firew Woldeyes 1
1Ethiopian Development Research Institute (EDRI)
2Institute of Development Studies (IDS)
October 17, 2017
1 / 80

2. Overview
Motivation
Background
Data
Summary Statistics
Empirics
Diff-in-Diff (fixed effects)
Fixed Effects Summary
Experiment
Experiment
2 / 80

3. Motivation
Tax to GDP ratio increases as GDP increases
[ Besley and Persson, 2014].
3 / 80

4. Motivation
Tax to GDP ratio increases as GDP increases
[ Besley and Persson, 2014].
Why?
4 / 80

5. Motivation
Tax to GDP ratio increases as GDP increases
[ Besley and Persson, 2014].
Why?
Extensive Margin: Inclusion of previously missing firms in to
the tax system
Less informality because of the need to work with in the
increasingly important formal financial markets
5 / 80

6. Intensive Margin
Intensive Margin: Higher taxes from firms already in the tax
system (i.e higher tax compliance)
6 / 80

7. Intensive Margin
Intensive Margin: Higher taxes from firms already in the tax
system (i.e higher tax compliance)
1. partly to do trust and norm [Kleven, 2014]
7 / 80

8. Intensive Margin
Intensive Margin: Higher taxes from firms already in the tax
system (i.e higher tax compliance)
1. partly to do trust and norm [Kleven, 2014]
2. Partly due to increased institutional capacity to enforce rules
(such as audit)
8 / 80

9. Intensive Margin
Intensive Margin: Higher taxes from firms already in the tax
system (i.e higher tax compliance)
1. partly to do trust and norm [Kleven, 2014]
2. Partly due to increased institutional capacity to enforce rules
(such as audit)
3. Since audit rates are low, the observed high compliance can
not be explained by higher institutional capacity
9 / 80

10. Intensive Margin
Intensive Margin: Higher taxes from firms already in the tax
system (i.e higher tax compliance)
1. partly to do trust and norm [Kleven, 2014]
2. Partly due to increased institutional capacity to enforce rules
(such as audit)
3. Since audit rates are low, the observed high compliance can
not be explained by higher institutional capacity
4. Mostly explained by increased availability of third party
information [Kleven, et al., 2011] due to the development of
financial markets enabling tracing transactions more easily and
also withholding by firms.
They find negligible evasion on individual income subjected to
third party informaiton whereas self reported income is
subjected to significant evasion. As most individual income is
subjected to third party information in Denmark, the overall
evasion is negligible. 10 / 80

11. Motivation, ctd
The difference in the extensive and intensive margin of
taxation between developed and developing countries implies
optimal tax in developing countries is different from developed
ones [Gordon and Li, 2009]
11 / 80

12. Motivation, ctd
The difference in the extensive and intensive margin of
taxation between developed and developing countries implies
optimal tax in developing countries is different from developed
ones [Gordon and Li, 2009]
Increasing taxation through the extensive margin requires
significance degree of formalization (increased share of firms
in the formal sector) which requires , among other things,
significant development of the financial system.
12 / 80

13. Motivation, ctd
Question: Can Developing countries increase tax GDP ratio
through the intensive margin by investing on tax
adminsitration capacity?
13 / 80

14. Motivation, ctd
Question: Can Developing countries increase tax GDP ratio
through the intensive margin by investing on tax
adminsitration capacity?
For instance, can use of increased information availability
improve tax collection capacity?:
Recent Literature suggests that this may be possible.
Specifically, the literature on IT and public services shows that
several developing countries have achieved increased efficiency
and quality of public service in developing countries
14 / 80

15. Motivation: IT and public service
[Lewis-Faupel, et al., 2016]The introduction of e-procurement
improves road quality but not speed of completion (India) and
reduced delays in project completion (Indonesia)
15 / 80

16. Motivation: IT and public service
[Lewis-Faupel, et al., 2016]The introduction of e-procurement
improves road quality but not speed of completion (India) and
reduced delays in project completion (Indonesia)
[Muralidharan, et al., 2016] find that the introduction of
biometrically authenticated payments infrastructure
(”Smartcards”) in India leads to a faster, more predictable,
and less corrupt NREGS payments process without adversely
affecting program access. It is also cost effective and
beneficiaries overwhelmingly preferred it.
16 / 80

17. Motivation: Shifting evasion
Another strand of the literature shows that there may be a
limit to how much tax compliance may be achieved through
the introduction of ICT.
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18. Motivation: Shifting evasion
Another strand of the literature shows that there may be a
limit to how much tax compliance may be achieved through
the introduction of ICT.
Recent literature shows that when third party information is
not complete, shifting of evasion to the area not covered by
third party information (for instance by increasing costs when
third party information is used for verifying sales
[Carrillo, et al. , fortcoming])
18 / 80

19. Existing study on Ethiopia
[Ali, et al., 2015] investigates whether there is an increase in
VAT declaration due to the introduction of the electonic sales
registration machine
19 / 80

20. Existing study on Ethiopia
[Ali, et al., 2015] investigates whether there is an increase in
VAT declaration due to the introduction of the electonic sales
registration machine
This paper, however, has several limitations.
20 / 80

21. Existing study on Ethiopia
[Ali, et al., 2015] investigates whether there is an increase in
VAT declaration due to the introduction of the electonic sales
registration machine
This paper, however, has several limitations.
1. Uses data only on those firms declaring VAT
21 / 80

22. Existing study on Ethiopia
[Ali, et al., 2015] investigates whether there is an increase in
VAT declaration due to the introduction of the electonic sales
registration machine
This paper, however, has several limitations.
1. Uses data only on those firms declaring VAT
2. Doesn’t ditinguish between gross VAT declaration and net VAT
decalration (firms could increase VAT declaration from sale but
compensate it by increasing VAT they paid for inputs)
22 / 80

23. Existing study on Ethiopia
[Ali, et al., 2015] investigates whether there is an increase in
VAT declaration due to the introduction of the electonic sales
registration machine
This paper, however, has several limitations.
1. Uses data only on those firms declaring VAT
2. Doesn’t ditinguish between gross VAT declaration and net VAT
decalration (firms could increase VAT declaration from sale but
compensate it by increasing VAT they paid for inputs)
3. Doesn’t investigate the response of firms in terms of
declarations for income tax purposes (i.e., sales, cost, profit)
23 / 80

24. Extending the Literature
We extend existing study in three directions
24 / 80

25. Extending the Literature
We extend existing study in three directions
1. Expand the study to look at the effect on income as reported
for profit tax (with a sub-objective to look at discrepancies
between the two)
25 / 80

26. Extending the Literature
We extend existing study in three directions
1. Expand the study to look at the effect on income as reported
for profit tax (with a sub-objective to look at discrepancies
between the two)
2. Investigate mechanism: Do firms shift evasion to margins with
less enforcement?
Investigate whether report of increased turnover is partially or
fully cancelled out with increased reported cost (for profit tax
purposes) and reported input value(for VAT purposes)
26 / 80

27. Extending the Literature
We extend existing study in three directions
1. Expand the study to look at the effect on income as reported
for profit tax (with a sub-objective to look at discrepancies
between the two)
2. Investigate mechanism: Do firms shift evasion to margins with
less enforcement?
Investigate whether report of increased turnover is partially or
fully cancelled out with increased reported cost (for profit tax
purposes) and reported input value(for VAT purposes)
3. Investigate the robustness of the identification strategy using
data from randomized control experiment)
We use an experiment to test our argument that the ESRM
indeed increases compliance (on income) for business profit
tax.
27 / 80

28. Background: Country
1. Low Income Country: GDP per capita (USD,ppp) as of 2015
is 1628.9.
28 / 80

29. Background: Country
1. Low Income Country: GDP per capita (USD,ppp) as of 2015
is 1628.9.
1.1 Compared to 3714.1 for SSA and 40.587.1 for OECD countries
29 / 80

30. Background: Country
1. Low Income Country: GDP per capita (USD,ppp) as of 2015
is 1628.9.
1.1 Compared to 3714.1 for SSA and 40.587.1 for OECD countries
2. Low and stable tax to GDP ratio and decreasing expenditure
to GDP ratio. But including capital expenditure by SOEs
reveals an increase in divergence between expenditure and
revenue.
30 / 80

31. Background: Country
1. Low Income Country: GDP per capita (USD,ppp) as of 2015
is 1628.9.
1.1 Compared to 3714.1 for SSA and 40.587.1 for OECD countries
2. Low and stable tax to GDP ratio and decreasing expenditure
to GDP ratio. But including capital expenditure by SOEs
reveals an increase in divergence between expenditure and
revenue.
3. High but gradually declining reliance of tax revenue from
international trade
31 / 80

32. Background: Country
1. Low Income Country: GDP per capita (USD,ppp) as of 2015
is 1628.9.
1.1 Compared to 3714.1 for SSA and 40.587.1 for OECD countries
2. Low and stable tax to GDP ratio and decreasing expenditure
to GDP ratio. But including capital expenditure by SOEs
reveals an increase in divergence between expenditure and
revenue.
3. High but gradually declining reliance of tax revenue from
international trade
4. Incresing role of indirect taxes such as VAT
32 / 80

33. Government Expenditure and Tax Revenue as a share of
GDP
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2000/01 2001/02 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14
Ratios of Tax Revenue and Government Expenditure to GDP
Total Government Expenditure Tax revenue Deficit_tax
33 / 80

34. Direct, Indirect, and Import taxes as a Share of Total Tax
Revenue
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
2000/01 2001/02 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13
Direct, Indirect, and Import taxes as a Share of Total Tax
direct tax ratio domestic indirect tax ratio import tax ratio
34 / 80

35. Background: Tax Policy Regime
Constant income tax and tax bracket during the period under
consideration
35 / 80

36. Background: Tax Policy Regime
Constant income tax and tax bracket during the period under
consideration
1. The income tax rate (30% for corporations and 10 to 35% for
non incorporated firms)
36 / 80

37. Background: Tax Policy Regime
Constant income tax and tax bracket during the period under
consideration
1. The income tax rate (30% for corporations and 10 to 35% for
non incorporated firms)
2. A VAT rate of 15% collected by firms with annual turnover
above 500000 birr
37 / 80

38. Background: Tax Policy Regime
Constant income tax and tax bracket during the period under
consideration
1. The income tax rate (30% for corporations and 10 to 35% for
non incorporated firms)
2. A VAT rate of 15% collected by firms with annual turnover
above 500000 birr
3. A 2% Turnover Tax rate for those firms with annual turnover
below 500000 birr
38 / 80

39. Background: Tax Policy Regime
Constant income tax and tax bracket during the period under
consideration
1. The income tax rate (30% for corporations and 10 to 35% for
non incorporated firms)
2. A VAT rate of 15% collected by firms with annual turnover
above 500000 birr
3. A 2% Turnover Tax rate for those firms with annual turnover
below 500000 birr
4. For all three tax types the rate and bracket are set in 2002
have not changed until July 2016
39 / 80

40. Background: Tax Enforcement
Electronic Sales registration machine transmits all sales data
directly to the database at the Ethiopian Revenue and
Customs Authority
40 / 80

41. Background: Tax Enforcement
Electronic Sales registration machine transmits all sales data
directly to the database at the Ethiopian Revenue and
Customs Authority
Electronic Sales registration machine introduced in 2008
41 / 80

42. Background: Tax Enforcement
Electronic Sales registration machine transmits all sales data
directly to the database at the Ethiopian Revenue and
Customs Authority
Electronic Sales registration machine introduced in 2008
The introduction of the machine was rolled out in steps
42 / 80

43. Background: Tax Enforcement
Electronic Sales registration machine transmits all sales data
directly to the database at the Ethiopian Revenue and
Customs Authority
Electronic Sales registration machine introduced in 2008
The introduction of the machine was rolled out in steps
The gradual roll out of the machines is one of our Key
identifying assumption (see empirical section)
43 / 80

44. Data
We only use data from category A (large individual firms and
corporations) and category B from Federal and Addis Ababa
tax payers data base
44 / 80

45. Data
Two data bases:
1. Annual Income Statement Data
1.1 Number of firms/observation that are reporting positive
turnover and cost data ( 100159 unique firms and 288600
observations)
2. Monthly VAT Declaration Data
2.1 We annualized the observations for comparison with the
income statement data
2.2 Number of firms/observation that are reporting positive
turnover and input data ( 95422 unique firms and 259776
observations)
45 / 80

46. Data: Annual Income Statement Data: Number of firms
Table: Number of Firms by Ethiopian Fiscal year
Variable 2009 2010 2011 2012 2013 2014
Total Number of
Firms**
10,800 17,374 46,316 60,283 67,067 67,292
Number of firms that
start using the machine
395 6,087 15,523 10,606 11,023 10,145
Number of firms that
are using the machine*
620 6825 23377 34,172 42,771 47,481
**The total number of firms reporting positive turnover and cost in that fiscal
year
*The number of firms that start using the machine before and including that
fiscal year and have reported positive turnover and cost
46 / 80

47. Data: Annual Income Statement Data: Average Income,
Cost, and Profit (in millions of birr)
year variable All Firms
Firms that start using
the machine in
the fiscal year
Firms that have not yet
adopted the machine
in the fiscal year
2009
Sales 10.7 42.3 8.9
Cost 9.6 37.6 8.0
profit 1.1 4.7 0.9
2010
Sales 9.7 14.3 5.1
Cost 8.8 13.0 4.6
profit 0.9 1.3 0.5
2011
Sales 5.4 3.9 1.8
Cost 4.9 3.7 1.6
profit 0.5 0.2 0.2
2012
Sales 5.1 3.0 1.8
Cost 4.7 2.9 1.1
profit 0.4 0. 0.7
2013
Sales 5.0 2.0 1.2
Cost 4.7 1.9 1.1
profit 0.3 0.1 0.1
2014
Sales 5.5 2.3 1.3
Cost 5.2 2.3 1.2
profit 0.3 0 0.1
The summary statistics is for those firms that declare non zero turnover.
47 / 80

48. Table: Mean of VAT payment (in ’0000 birr)
2008 2009 2010 2011 2012 2013 2014
All Firms
VAT on Sale 52.65 46.90 72.01 85.54 84.85 90.23 121.90
VAT on inputs 23.54 24.92 28.45 38.08 37.44.45 36.31 66.31
VAT Net 29.10 22.00 43.55 47.45 47.41 53.92 55.58
Using Machine
VAT on Sale 267.74 26212 251.28 149.46 129.23 122.40 129.29
VAT on inputs 180.13 175.6 123.55 82.30 83.31 78.20 69.04
VAT Net 97.13 89.70 153.73 98.20 70.70 67.51 60.24
48 / 80

49. Diff-in-Diff (fixed effects)
Three Kinds of Firms:
(i)That have reported before and after adopting the machine
(ii) That started to report after adopting
(iii) That have never adopted
49 / 80

50. Diff-in-Diff (fixed effects)
Three Kinds of Firms:
(i)That have reported before and after adopting the machine
(ii) That started to report after adopting
(iii) That have never adopted
Strategy: Fixed effect assuming similar trend
50 / 80

51. Diff-in-Diff (fixed effects)
Three Kinds of Firms:
(i)That have reported before and after adopting the machine
(ii) That started to report after adopting
(iii) That have never adopted
Strategy: Fixed effect assuming similar trend
This includes all firms with no regard whether they eventually
adopt or not
51 / 80

52. Fixed Effects Model
Yit = α + βMit + φt + γi + it (1)
Mit = 1 for years after the firm started using the machine and it is
zero before
γi = Firm fixed effect
φt= time fixed effect
52 / 80

53. Empirical Results: Reported Turnover and Cost fixed
effects model
Use of machine is associated with higher reported revenue
53 / 80

54. Empirical Results: Reported Turnover and Cost fixed
effects model
Use of machine is associated with higher reported revenue
Profit (profit tax) grows at roughly the same rate as revenue.
i.e., firms keep the profit revenue ratio constant
54 / 80

55. Empirical Results: Reported Turnover and Cost fixed
effects model
Use of machine is associated with higher reported revenue
Profit (profit tax) grows at roughly the same rate as revenue.
i.e., firms keep the profit revenue ratio constant
Two implications:
55 / 80

56. Empirical Results: Reported Turnover and Cost fixed
effects model
Use of machine is associated with higher reported revenue
Profit (profit tax) grows at roughly the same rate as revenue.
i.e., firms keep the profit revenue ratio constant
Two implications:
1. Machine introduction increases compliance (increase revenue
and profit) but to a limited extent (increase costs)
56 / 80

57. Empirical Results: Reported Turnover and Cost fixed
effects model
Use of machine is associated with higher reported revenue
Profit (profit tax) grows at roughly the same rate as revenue.
i.e., firms keep the profit revenue ratio constant
Two implications:
1. Machine introduction increases compliance (increase revenue
and profit) but to a limited extent (increase costs)
2. There is evasion shifting (i.e. some of the increase in revenue
is offset by an increase in cost)
57 / 80

58. Empirical Results: Reported Turnover and Costs fixed
effects model
Table: The response of firms to machine Introducton: declaration of
turnover and cost and profit tax (all cohorts)
All firms profit declaring firms
Turnover Cost Turnover Cost profit
post 0.51∗∗∗
0.49∗∗∗
0.40∗∗∗
0.44∗∗∗
0.28∗∗∗
[0.01] [0.01] [0.01] [0.01] [0.01]
time fixed effect Yes Yes Yes Yes Yes
R-squared 0.10 0.11 0.12 0.11 0.06
N 212928 212928 187886 187886 187886
Standard errors in brackets
∗
p < 0.1, ∗∗
p < 0.05, ∗∗∗
p < 0.01
Firm and time fixed effect are included in all regressions
58 / 80

59. Empirical Results: Reported Turnover and Costs fixed
effects model 2
Table: The response of firms to machine Introducton: declaration of
turnover and cost and profit tax (all cohorts using firms that adopt the
machine by 2016 as controls)
All firms profit declaring firms
Turnover Cost Turnover Cost profit
post 0.46∗∗∗
0.44∗∗∗
0.34∗∗∗
0.37∗∗∗
0.22∗∗∗
[0.01] [0.01] [0.01] [0.01] [0.01]
time fixed effect Yes Yes Yes Yes Yes
R-squared 0.12 0.13 0.15 0.13 0.07
N 168588 168588 146249 146249 146249
Standard errors in brackets
∗
p < 0.1, ∗∗
p < 0.05, ∗∗∗
p < 0.01
Firm and time fixed effect are included in all regressions
This is a result restrcting the sample to firms that have adopted the machine
by 2016.
59 / 80

60. Empirical Results: Reported Turnover and Costs fixed
effects model 2011 cohort
Table: The response of firms to machine Introducton: declaration of
turnover and cost and profit tax (2011 cohort)
All firms profit declaring firms
Turnover Cost Turnover Cost profit
post 0.28∗∗∗
0.26∗∗∗
0.25∗∗∗
0.28∗∗∗
0.19∗∗∗
[0.03] [0.03] [0.02] [0.02] [0.03]
time fixed effect Yes Yes Yes Yes Yes
R-squared 0.14 0.14 0.18 0.17 0.05
N 47110 47110 30024 30024 30024
Standard errors in brackets
∗
p < 0.1, ∗∗
p < 0.05, ∗∗∗
p < 0.01
Firm and time fixed effect are included in all regressions
This is a result comparing firms that adopt in 2011 with those that adopt in
later years
60 / 80

61. Empirical Results: Reported Turnover and Costs fixed
effects model 2012 cohort
Table: The response of firms to machine Introducton: declaration of
turnover and cost and profit tax (2012 cohort)
All firms profit declaring firms
Turnover Cost Turnover Cost profit
post 0.64∗∗∗
0.61∗∗∗
0.49∗∗∗
0.53∗∗∗
0.36∗∗∗
[0.02] [0.02] [0.02] [0.02] [0.02]
time fixed effect Yes Yes Yes Yes Yes
R-squared 0.09 0.08 0.07 0.06 0.04
N 59977 59977 53790 53790 53790
Standard errors in brackets
∗
p < 0.1, ∗∗
p < 0.05, ∗∗∗
p < 0.01
Firm and time fixed effect are included in all regressions
This is a result comparing firms that adopt in 2012 with those that adopt in
later years
61 / 80

62. Empirical Results: Reported Turnover and Costs fixed
effects model 2013 cohort
Table: The response of firms to machine Introducton: declaration of
turnover and cost and profit tax (2013 cohort)
All firms profit declaring firms
Turnover Cost Turnover Cost profit
post 0.56∗∗∗
0.56∗∗∗
0.48∗∗∗
0.54∗∗∗
0.33∗∗∗
[0.02] [0.02] [0.02] [0.02] [0.02]
time fixed effect Yes Yes Yes Yes Yes
R-squared 0.09 0.08 0.08 0.07 0.04
N 74594 74594 67452 67452 67452
Standard errors in brackets
∗
p < 0.1, ∗∗
p < 0.05, ∗∗∗
p < 0.01
Firm and time fixed effect are included in all regressions
This is a result comparing firms that adopt in 2013 with those that adopt in
later years
62 / 80

63. Empirical Results:Testing similarity of pre trends for the
2012 cohort
1212.51313.5
logtunrnver
2010 2011 2012
Year
mean tunover for 2012 cohort mean tunover for adopters later than 2012
Log tunrover trend of 2012 cohort vs later adopters
63 / 80

64. Empirical Results:Testing similarity of pre trends for the
2013 cohort
11.51212.513
logtunrnver
2010 2011 2012 2013
Year
mean tunover for 2013 cohort mean tunover for adopters later than 2013
Log tunrover trend of 2013 cohort vs later adopters
64 / 80

65. Fixed Effcts Model Summary
The ESRM helps to increase compliace, but part of that effect
is counterbalanced by increases in cost. Specifically, both
turnover (sales) and cost (for profit tax purposes) increase.
The net effect is lower than the increase in sales (turnover)
but an increase in reported profit.
65 / 80

66. Fixed Effcts Model Summary
The ESRM helps to increase compliace, but part of that effect
is counterbalanced by increases in cost. Specifically, both
turnover (sales) and cost (for profit tax purposes) increase.
The net effect is lower than the increase in sales (turnover)
but an increase in reported profit.
The implication is that there needs to be a comrehensive
system of tax administration and data managemen tthat
includes all aspects of the firms accounts - although we need
to recognise that costs will always be harder to check.
66 / 80

67. Fixed Effcts Model Summary
The ESRM helps to increase compliace, but part of that effect
is counterbalanced by increases in cost. Specifically, both
turnover (sales) and cost (for profit tax purposes) increase.
The net effect is lower than the increase in sales (turnover)
but an increase in reported profit.
The implication is that there needs to be a comrehensive
system of tax administration and data managemen tthat
includes all aspects of the firms accounts - although we need
to recognise that costs will always be harder to check.
We recognize that the ESRM may not be a pure treatment
(see table before looking at differences between T and C
groups). More specifically, it is true that larger firms start
adopting the machine earlier, so that might be where we see a
positive effect. To address this potential problem, we look at
experimental data.
67 / 80

68. Experiment Design
3120 firms in Addis Ababa (not in category C) were selected
randomly in 2013/14 [Shimeles, et al., 2017]
1000 control firms.
Two kinds of letters are sent to the firms (one cautioning
about audit and the other encouraging compliance).
The letters were sent in June 2014 just before the tax
declaration time (theerfore after all economic activity is done).
The resulting payments of profit tax for the treated group and
the 1000 control group firms are compared to analyze the
impact of treatment and machine use.
68 / 80

69. Hypothesis
There is a finding in the literature that if there is already a
paper trail, increased enforcement through issuance of a letter
doesn’t have an effect [Pomeranz, 2015]
If sales registration machine has increased the paper trail and
thereofre compliance, we expect no or smaller effect of the
letter on these firms.
69 / 80

70. Experiment result: Basic Result
Table: The response of profit tax to treatment
Persuasion 0.31***
[0.108]
Coercion 0.38***
[0.097]
Constant 8.40***
[0.4]
R-squared 0.237
N 2,255
Standard errors in brackets
*** p < 0.01 , ** p < 0.05 , * p< 0.1
70 / 80

71. Experiment result: Basic Result
The treated firms increase reported profit by 38% if the letter
is coercive (audit) and 32% if the letter is persuation.
However, these two coefficients are not statistically different:
the letter has the same effect regardless of the content(i.e.,
coercion and persuation)
The next question: Do firms reactto the letter even after
having experienced the increased enforcement through the
machine?
71 / 80

72. Experiment result: Response of machine users to treatment
Table: The Impact of Treatment on Profit Tax: Differences between
machine users and non users
A B C
Treated 0.11 0.20*** 0.04
[0.11] [0.07] [0.08]
Not users of ESRM -1.40*** -0.66***
[0.13] [0.11]
treat non esrm 0.74*** 0.31**
[0.18] [0.14]
Individual -0.58*** -0.53***
[0.09] [0.10]
Top 25 % in turnover 2.93*** 2.89***
[0.08] [0.08]
Constant 8.96*** 8.90*** 9.18***
[0.12] [0.12] [0.13]
R-squared 0.494 0.216 0.506
N 2,112 2,255 2,112
Standard errors in brackets
*** p < 0.01 , ** p < 0.05 , * p< 0.1
72 / 80

73. Experiment result: Response of machine users to treatment
Table: The Impact of Treatment on Turnover: Differences between
machine users and non users
Turnover (A) Turnover(B)
Treated 0.01 -0.06
[0.10] [0.07]
Not users of ESRM -0.94*** -0.59***
[0.13] [0.09]
treat non esrm 0.37** 0.26**
[0.17] [0.12]
Individual -0.27***
[0.08]
Top 25 % in turnover 3.24***
[0.06]
Constant 12.84*** 12.62***
[0.11] [0.11]
R-squared 0.234 0.645
N 2,102 2,102
Robust standard errors in parentheses
*** p<0.01 , ** p<0.05 , * p<0.1 73 / 80

74. Experiment result: Response of machine users to treatment
The treatment doesn’t affect the reported turnover neither
profit of machine using firms
Firms that do not use the machine respond by increasing their
reported profit tax by 0.74%
All the treatment effect is on those that do not use the
machine.
The result is robust for various specifications. i.e., treatment
(letter) doesn’t increase reported sales and profit of the firm.
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75. Experiment summary
Although the reported results are initial estimates, we observe
two things:
1. The results regaridng the increased tax compliance due to
machine use is robust
2. The compliance has increased enough that further enforcement
threat that doesn’t increase information availability may not be
successful
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76. Conclusion
Use of IT increases compliance: Increased profit payment that
results from higher sales report coupled with some offset by
increased cost.
The compliance has increased enough that further
enforcement threat that doesn’t increase information
availability may not be successful
The offset through increased cost indicates that there must be
other efforts that compliment the machine introduction ( third
party information).
This can be done by increasing the infromation the machine
transmits to ERCA’s database centre. For instance, it can be
made to include the TIN number of firms the firm sells to.
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77. References, 1
Besley, T. and Persson, T. (2014)
Why Do Developing Coountries Tax So Little?
Journal of Economic Perspectives 28(4), 99 – 120.
Henrik Jacobsen Kleven, Martin B. Knudsen, Claus Thustrup Kreiner,
Sren Pedersen, Emmanuel Saez (2011)
Unwilling or Unable to Cheat? Evidence From a Tax Audit Experiment in
Denmark
Econometrica 79(3), 651 – 692.
Henrik Jacobsen Kleven (2014)
How Can Scandinavians Tax So Much?
Journal of Economic Perspectives 28(4), 77-98
Gordon, R. and Li, W. (2009)
Tax structures in developing countries: Many puzzles and a possible
explanation
Journal of Public Economics, 93(7-8), 855-866
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78. References, 2
Allingham, Michael G. and Agnar Sandmo. (1972)
Income Tax Evasion: A Theoretical Analysis ,
Journal of Public Economics, 1972, 1 (3-4), 323338.
Paul Carrillo, Dina Pomeranz, Monica Singhal (forthcoming)
Dodging the Taxman: Firm Misreporting and Limits to Tax Enforcement
American Economic Journal: Applied Economics
Lewis-Faupel, Sean, Yusuf Neggers, Benjamin A. Olken and Rohini Pande
(2016)
Can Electronic Procurement Improve Infrastructure Provision? Evidence
from Public Works in India and Indonesia
American Economic Journal: Economic Policy, 8(3): 258-83.
Muralidharan, Karthik, Paul Niehaus and Sandip Sukhtankar (2016)
Building State Capacity: Evidence from Biometric Smartcards in India
American Economic Review, 106(10): 2895-2929.
78 / 80

79. References, 3
Merima Ali, Abdulaziz Shifa, Abebe Shimeles and Firew Woldeyes (2015)
Information Technology and Fiscal Capacity in a Developing Country:
Evidence from Ethiopia
ICTD Working Paper 31
Shimeles, Abebe, Daniel Zerfu Gurara, and Firew Woldeyes (2017)
Taxman’s Dilemma: Coercion or Persuasion? Evidence from a
Randomized Field Experiment in Ethiopia
American Economic Review,2017, 107(5), 420-24.
Pomeranz, Dina. 2015
No Taxation without Information: Deterrence and Self-Enforcement in the
Value Added Tax
American Economic Review, 105(8),2539-69
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80. The End
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