What is the price elasticity of demand for international tax evasion services? Base erosion and profit shifting (both evasive and legal) for corporations as well as offshore tax evasion on part of individuals have been identified as important components of global trends in inequality (Guyton et al. (2020); Tørsløv, L. S. Wier, and Zucman (2018)) and relative decreases in tax collections (OECD (2015), Hines and Rice (1994)). Due to its clandestine nature, it is difficult to observe evasive tax strategy in a research setting. Moreover, a lack of shocks has limited researchers’ abilities to study quasi-experiments focusing on tax evasion.
This study makes use of the novel data and legislative environment in Ecuador. As the global financial crisis emerged at the end of 2007, Ecuador, a completely Dollarized economy without conventional monetary policy tools, ratified the Impuesto a la Salida de Divisas (ISD), a tax on all foreign outflows. This tax operated as a quasi-monetary policy, aimed to limit the flight of US Dollars from the Ecuadorian economy. To facilitate the collection and enforcement of the ISD, the tax authorities, the Servico de Rentas Internas(SRI) installed comprehensive data infrastructure on the universe of transactions with foreign parties. This study combines this data with legislative shocks to the ISD that alter the tax’s rate and base (including changes in exemptions involving transactions with fiscal havens) to study the price-reactivity of sending funds to offshore bank accounts and foreign corporate affiliates.
Results and Policy Lessons
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