The most effective measures to collect taxes

The levels of tax evasion in Latin America are high: it is estimated that the evasion rate for income tax reaches 46 percent in  Bolivia, 58 percent in Ecuador, 33 percent in Mexico, and up to 70 percent in Guatemala, in contrast to that of the United States, which hardly reaches 16 percent.  

This situation limits the aspirations of the countries of the region and reduces their capacity to raise the funds necessary to invest, for example, in education, health, security, or infrastructure. 

In the case of local governments, the low tax collection prevents the allocation of enough resources to cover the basic management needs, as an important percentage of the annual budget depends on tax collections. 

The good news is that there are diverse mechanisms to improve tax collections: it has been demonstrated that sending communications to taxpayers is very effective to make them comply with their obligations. 

But, what type of communication or message is more effective as a coercive mechanism to encourage tax payments?

An experiment conducted jointly with the Mayor's Office of Sucre, in Caracas, explored the effect of using legal figures such as summons (threat of lawsuit) and notifications to taxpayers, to see if they increased the probability of collecting property taxes (residential and commercial), also observing the net increase of tax collections. For this impact evaluation work was carried out with 800 real estate debtors from the taxpayer data base of urban real estate (400 residential and 400 commercial). 

Each one of these groups was divided into two sub-groups of equal size; one for the analysis of the summons and one for the analysis of the notification. Within each one of the four sub-groups, the properties were randomly selected for the corresponding treatment and for the control group. In the simple model, the impact of the summons was 44 percent for commercial debtors, and 14 percent for residential debtors, while the notification reached 17 percent for commercial debtors and 8 percent for residential debtors. 

The results indicate that both instruments have a significant impact both on residential debtors as well as commercial. However, as expected, the effect of the summons is much greater. Likewise, although with a very significant impact for both types of taxpayers, the summons looks slightly stronger for commercial taxpayers (who could have more significant operational and reputation costs).  

The analysis also suggests that commercial taxpayers who have been summoned for one of their properties are more likely to pay taxes owed for other properties even if those have not been summoned/notified. In addition, the evaluated instruments increase tax collections in urban properties with an apparent effect on the delay in payment of other municipal taxes, implying net tax gains. 

It is also noteworthy that to maintain these results, the instrument must have credibility, as it is the base of its effectiveness. Credibility may be threatened if debtors consider than non-compliance of tax payments will not have significant consequences, so maintaining credibility in the long term could mean fulfilling the threats. 

In summary, the summons is stronger, faster, and more persistent, albeit more costly, especially to maintain its credibility. The notification could still be useful for cases where summons ae not desirable, such as when the family is involved.