Tax enforcement using a hybrid between self- and third-party reporting

Abstract

We study a tax enforcement policy combining elements of self- and third-party reporting. Taxpayers self-report to the authority but must file documentation issued by a third-party to corroborate claims. Exploiting salary-dependent cutoffs governing documentation requirements when claiming deductions for charitable contributions in Cyprus, we estimate that deductions increase by £0.7 when taxpayers can claim £1 more without documentation. Second, using a retroactive reform we find that at least 64% of the response is purely a reporting adjustment representing mainly over-reporting of deductions. Finally, reporting rules drive the behaviour of many taxpayers who display little responsiveness to financial incentives for giving.