How to Improve Small Firms’ Payroll Tax Compliance? Evidence from a randomized Field Experiment

Payroll tax evasion by firms is widespread and threatens the functioning of welfare systems in many countries around the world, yet very little is known about how to combat it. We report results from a large scale RCT testing strategies to improve payroll tax compliance of small firms in a middle income country. We randomize announced audit probabilities (1%, 10%, 40% or 60%) on the firm level and implement several novel types of moral appeals (varying information on the benefits of tax-financed public goods). Our monthly tax return data show that both deterrence and moral measures significantly improve payroll tax compliance. A high audit probability thereby has a 50% greater impact than moral appeals. An additional treatment with ambiguous audit probability shows that behavioral factors (such as probability neglect) play a minor role for increasing compliance in the deterrence treatments.