About Andrea Lopez-Luzuriaga

Deductions for personal expenses often feature thresholds above which additional documentation is needed. These itemizing thresholds have two well-established roles: adding a non-monetary cost to the extra tax benefit, and transferring the burden of proof of the legality of the deduction to the taxpayers. Both roles suggest the imposition of deduction thresholds should increase tax revenues. This paper documents for the first time the existence of an additional role for the threshold of itemizing rules: disclosing information about the tax authority’s audit procedures. If deduction thresholds change individuals’ perceptions about enforcement rules, the effect on tax liability is uncertain. I show in a simple conceptual framework how the introduction of an itemizing rule could increase reported deductions, which leads to a decrease in tax liability. To test the hypothesis, I use a natural experiment in Ecuador, where an itemizing rule was implemented retroactively. Several months after the fiscal year was over and the tax returns had been submitted, the tax authority required itemization of personal expenses for people who had made a deduction over $7,500 in 2008, without changing the tax benefit. A relatively large portion of taxpayers amended their 2008 income tax returns after the change in the deduction rules. I observe a substantial increase in the deductions reported under the itemizing threshold, so the overall effect of the reform was a decrease in reported tax liability.

Andrea Lopez-Luzuriaga

Research

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