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

Payroll tax evasion by firms is widespread and threatens welfare systems, yet little is known about how to combat it. We report results from a randomized control trial targeting 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 (emphasizing tax-financed goods). We show that both deterrence and moral measures improve payroll tax compliance. Higher audit probabilities generate 50% more additional revenues than moral appeals. An additional treatment with ambiguous audit probability shows that behavioral factors play a limited role in deterrence effects.