Hard versus Soft Intervention: Compliance Effects among Firms 1

Abstract Audits and letters are two of the enforcement strategies available to a tax administration to ensure compliance. In this paper, we use a unique set of experiments to determine which of the two enforcement strategies is more effective. We use firm-level data from 1,974 randomized audits and 8,000 information letters. We find that audits result in an immediate and significant increase in firms' payroll tax remittance, whereas letters have a weaker effect. Updated, perceived audit probability seems to sustain adjustments in payroll tax remittance two years post-treatment (on-site audit or standardized, electronic information letters). Firms receiving the information letters also adjust their remittance upwards, and more so when the letters are actually read. Our “back of the envelope” cost-benefit calculations suggest that tax administrations could save resources by partially switching to cheaper enforcement strategies, like information letters.