This study employs administrative tax return and audit data to examine the effects of three Internal Revenue Service (IRS) enforcement policies focused on large corporations. The threshold for IRS Large Business and International Division monitoring increased from $5 million in 2000 and 2001 to $10 million in assets starting in 2002. Beginning in the 2004 tax year, the IRS requires C corporations with at least $10 million in assets to file Schedule M-3, which reconciles reported incomes in financial statements and tax returns. In the same year, we observe a shift in audit policy resulting in a discrete jump in audit rates at the $10 million asset threshold. We find that C corporations strategically bunch below the $10 million asset threshold in most years from 2004 to 2010. Using variation in audit rates around the $10 million threshold over time and the staggered Schedule M-3 implementation dates for C corporations and S corporations, our evidence collectively suggests C corporations bunch below the threshold primarily to avoid higher audit rates. We implement a triple difference estimator to show that the enforcement notch at $10 million in assets has persistent effects on corporation size.

In this study, we aim to present an effective methodology tailored for companies interested in implementing adaptive experimentation in scenarios characterized by potential selection biases or endogeneity. We apply our approach to online platforms as they routinely conduct thousands of A/B tests annually to gain insights into the impact of user-facing features.

Governments introduce various policies intending to improve the overall economy or to influence individual behavior. However, estimating the causal impact of these policies is challenging. I describe how the Synthetic Control Method (SCM) can be used in undergraduate econometrics or capstone courses to estimate the impact of economic policies. The SCM is a data-driven design that provides a systematic way of constructing a comparison group that looks very similar to the group implementing the policy. Thus, it allows us to estimate the policy’s impact by comparing the outcome variable’s post-policy path between the policy group and the comparison group. I review a broad range of policies and events that are analyzed using this method, briefly describe the theory behind the method, discuss various best practices, and provide a step-by-step implementation guide using the adoption of a value-added tax (VAT) as an example.

This paper uses confidential tax returns data from sole proprietor businesses to estimate behavioral responses to the introduction of Form 1099-K, a third-party income reporting law that requires credit and debit card companies to report to the Internal Revenue Service gross of payment transactions that businesses receive through their payment systems. We estimate the causal impact of Form 1099-K on business reporting by exploiting a natural experiment in which some cities in the U.S. passed ordinances requiring taxicabs to install credit card readers in their vehicles, while other cities did not pass such ordinances, creating plausibly exogenous variation in the share of receipts reported on Form 1099-K. We find that taxpayers respond to third-party information reporting in offsetting ways. In particular, we find that businesses from cities with mandatory credit card in taxicab ordinances reported more receipts after …

How does third-party income reporting affect tax compliance? We use confidential administrative data from tax returns and information reports to estimate the impact of third-party income reporting on small business tax compliance. Since 2011, payment settlement entities (e.g., American Express) were required to report payment card transactions to both the firm and the Internal Revenue Service using Form 1099-K. This requirement made businesses’ receipts from payment cards—but not their cash receipts—third party reported. Consequently, businesses located in higher payment card use areas experienced greater levels of third-party reporting than businesses located in lower credit card use areas. We construct an index of payment card use at the commuting zone level, and we use this variation to identify the effect of Form 1099-K on reported receipts and deductions by small businesses. Overall, we find that the legislation modestly increased reported receipts without significantly increasing deductions. We also find substantial heterogeneity, with smaller firms, firms in business-to-consumer industries, and partnerships reporting a relatively large increase in receipts and a partially offsetting increase in deductions, implying a modest increase in tax compliance.

The proponents of decentralization argue that it improves economic growth, while critics say it increases regional inequality. The empirical evidence is mixed and based mostly on developed countries due to a lack of income data for lower administrative regions. We combine night‐lights data captured by satellites with a new database on decentralization derived from actual laws that are institutionalized and circumscribed from a global sample of countries. We then analyze the impact of decentralization on regional convergence using income data from the first and second administrative regions. We find that decentralization hinders within‐country regional convergence, especially in the developing countries.

Ensuring tax compliance is an enduring problem for governments in all countries. In this paper, we examine the role of information reporting in increasing tax compliance. We first discuss the practice of information reporting in the US, including a recent IRS initiative that implemented information reporting for income received through debit and credit cards via the new Form 1099-K. We then review the literature on the compliance effects of information reporting. Finally, we report some new evidence that indicates that Form 1099-K information reporting had significant–but heterogeneous–impacts on compliance rates of different types of business reporting.

Theory predicts that a value‐added tax (VAT) is an efficient tax system, which is one of the primary reasons for its rapid adoption worldwide. However, there is little empirical evidence supporting this prediction, especially for developing countries. I estimate the efficiency gains of introducing a VAT using the synthetic control method. I find that a VAT has, on average, positive and economically meaningful impact on economic efficiency. This result, however, is driven by richer countries only. There is no significant impact of the VAT on poorer countries. The findings are robust across a series of placebo studies and sensitivity checks.

A number of advanced economies carried out a sequence of extensive reforms of their labor and product markets in the 1990s and early 2000s. Using the Synthetic Control Method (SCM), this paper implements six case studies of well-known waves of reforms, those of New Zealand, Australia, Denmark, Ireland and Netherlands in the 1990s, and the labor market reforms in Germany in the early 2000s. In four of the six cases, GDP per capita was higher than in the control group as a result of the reforms. No difference between the treated country and its synthetic counterpart could be found in the cases of Denmark and New Zealand, which in the latter case may have partly reflected the implementation of reforms under particularly weak macroeconomic conditions. Overall, also factoring in the limitations of the SCM in this context, the results are suggestive of a positive but heterogenous effect of reform waves on GDP …

Tax reforms are often motivated by their potential to improve economic performance. However, their actual impacts are difficult to quantify. We analyze the impact of flat tax reform on incomes using “synthetic control” methods. We identify the eight Eastern and Central European countries that adopted flat tax systems between 1994 and 2005, and then compare post‐reform GDP per capita of “treated” countries with a convex combination of similar but “untreated” countries, while accounting for the time‐varying impact of unobservable heterogeneity. We find positive impacts in all eight countries, with seven out of eight cases significant at the conventional level.