Tax Enforcement Using a Hybrid Between Self- and Third-Party. How tax information is recorded and validated is a key component of the enforcement mechanism, which is a fundamental component of all tax systems.1 This study examines how a straightforward documentation requirement that taxpayers must follow when reporting their information to the tax authorities affects tax compliance. This policy is examined within the framework of a semi-formal economy where enforcement plays a crucial role.
We use the Republic of Cyprus’s charitable donation context to analyze behavioral responses to the hybrid reporting regulation, where the reporting arrangement is perfect for our needs. Five In Cyprus, charitable contributions are tax-deductible, but only if the basic documentation requirements mentioned above are met. Crucially for our empirical approach, the need to submit third-party-issued evidence only becomes active when taxpayers report greater than a certain amount in total charitable contributions.
Snippets of sections
Institutional context and data
The institutional framework of charitable giving in Cyprus, the related reforms we take advantage of, and the administrative dataset we utilize to analyze this enforcement policy are all covered in this section.
Conceptual framework
We offer a stylized theoretical framework based on the model proposed in Tazhitdinova (2018) to elucidate the incentives generated by the reporting environment in the Cypriot setting. Despite its simplicity, the framework captures the essential elements of our empirical setup.
Reactions of behavior to a hybrid reporting rule
We provide compelling data to start our empirical study, indicating that reported contributions appear to react strongly to changes in the reporting environment. As previously mentioned, our analysis period encompasses two changes that raised the reporting threshold levels: those that were introduced in 2003 and 2008. We examine their relationship to reported donations in Fig. 2 by charting the average reported donations across time and using vertical dashes to indicate the years before the reforms.
Separating real and reporting responses
Now that we have demonstrated that reported donations react favorably to this enforcement approach, we will use the 2008 reform’s timing to characterize the makeup of this response. As previously mentioned, the 2008 fiscal year ended before the adjustment was made, however, it was indicated that the threshold up to which no receipts are required was changed from CYP 150 to CYP 175 (300 euros). Therefore, real donating behavior could not be changed at the time of the announcement.
Conclusion
This study examines how people behave in response to a popular tax enforcement strategy that incorporates aspects of both self- and third-party reporting in the context of charity donations in the Republic of Cyprus. To offer several findings that are pertinent to policy, we analyze a semi-formal economy, which allows us to make use of several sources of quasi-experimental variation in reporting requirements and tax-price subsidies.