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Taxation, Information and Withholding: Evidence from Costa Rica

Author

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  • Brockmeyer, Anne
  • Hernandez, Marco

Abstract

Withholding of taxes by employers and by firms' trading partners is common around the world, but absent in public finance theory. We demonstrate the surprising power of withholding as a tax collection instrument, studying a scheme in Costa Rica where credit-card companies withhold tax on card sales. Doubling the withholding rate increases sales tax remittance among treated firms by 32 percent and aggregate revenue by 8 percent, although the statutory tax rate and third-party reporting requirements remain unchanged. We identify the mechanisms driving this effect and show that the current withholding rate is below the welfare-maximizing rate.

Suggested Citation

  • Brockmeyer, Anne & Hernandez, Marco, 2022. "Taxation, Information and Withholding: Evidence from Costa Rica," CEPR Discussion Papers 17716, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17716
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    More about this item

    Keywords

    Taxation;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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