Firms as tax collectors

The question of how taxes should be collected is usually at the forefront of tax authorities’ debates. Among the possible methods, withholding systems—in which third parties collect and remit taxes owed by related parties—have historically played a central role in easing the burden of tax administrations.

This paper shows that delegating tax collection to large firms can help build tax capacity in weak-enforcement settings. It exploits two reforms in Argentina that dramatically expanded and subsequently reduced turnover tax withholding by firms.

Combining firm-to-firm data with regression discontinuity and difference-in-differences methods around revenue eligibility thresholds the paper finds that:

• Large firms appointed as collection agents (CAs) are not affected;
• Firms commercially linked to CAs self-report more sales by 5.8 percent in response to higher withholding;
• Firms respond symmetrically to a decrease in withholding by reporting lower sales.

Tax-collecting firms can thus boost compliance and tax revenue.