Intertemporal Income Shifting and Tax Evasion: Evidence From an Uruguayan Tax Reform

Abstract

This paper provides empirical evidence on intertemporal income shifting during the implementation of a major tax reform in Uruguay. We exploit VAT and income tax returns for the universe of individuals that declare activity as liberal professionals (e.g. lawyers, public notaries, architects, engineers and accountants) during the years around the reform. Using a difference-in-difference approach, we document large shifting responses of personal business income in the month before the reform became effective. After controlling for fixed effects, on average an amount of 134,900 Uruguayan pesos (approx. 5,690 USD) is shifted in order to receive a beneficial fiscal treatment. This amount represent 99% of the average bi-monthly income reported in 2007. The income shifted increases up to 142.6 and 174.4% of the average reported income for the top 5 and top 1 percentiles. Furthermore, we show that architects and engineers, public notaries, and lawyers respond much stronger, especially if they perform their activity in the capital city. This suggests that income shifting, as a means of tax evasion, depends on the information spillovers and the salience of the tax reform.

Keywords: income shifting, tax evasion, emerging economies

JEL Classification: H26, H24, H20