Monitoring Superrich: the Effects of Indonesian High-Wealth Individuals (HWI) Tax Office

Abstract

I study the effects of monitoring high-wealth individuals on tax compliance and revenues. I exploit quasi-experimental variation generated by the implementation of the Indonesian High-Wealth Individuals (HWI) Tax Office in 2009, which monitors individuals with gross assets of more than 100 billion IDR (around 10 million USD in 2009) and who reside in Jakarta (Indonesian capital). I compare reported income and income taxes of HWIs administered by HWI Tax Office and HWIs administered by ordinary tax offices before (2007-2008) and after (2010-2014) the policy. I document that the reported income and income taxes of HWIs administered by the HWI Tax Office decreased by 43.9 percent and 40.5 percent, respectively, over six years relative to those of HWIs administered by ordinary tax offices. The results support the literature that predicts that in the face of a highly probable scrutiny the optimal strategy for HWI might involve some underreporting of income.