Tax Enforcement Spillovers - Evidence from Business Tax Audits in South Africa

Abstract Taxpayer audits are key instruments to combat tax evasion. Whether they deter tax non-compliance beyond audited taxpayers is largely unclear, however. Drawing on rich tax administrative data for South Africa, we show that business tax audits enhance the tax reporting compliance of unaudited firms in the same neighborhood and tax preparer network as the targeted business. On average, firms’ reported tax liability increases by around 1% when a business in close proximity (located within a 100-m radius) undergoes an audit and equally by around 1% when a firm in the same tax preparer net is audited. These estimates translate into sizable aggregate revenue gains as audited firms are linked to numerous other firms within their networks. Our findings carry important implications for the design of tax enforcement policies.