Does Stronger Tax Enforcement Improve Voluntary Tax Compliance? Evidence from administrative tax return data

This paper examines the effects of tax enforcement on tax compliance by exploiting institutional changes in Japan’s tax filing system, including the introduction of mandatory reporting of Individual Numbers (known as the “My Number” system) in 2016. We distinguish between two channels of tax enforcement: filing-stage enforcement, which requires taxpayers to provide supporting documentation and report their “My Number” Individual Numbers when filing tax returns, and audit-stage enforcement, which corrects noncompliance through tax audits. We also distinguish between mechanical compliance, induced directly by filing requirements, and deterrence-based compliance, arising from the perceived risk of detection and enforcement. Our analysis uses administrative tax records covering the universe of individual income tax returns. We find that compliance improved for the dependent exemption, for which filing-stage enforcement was strengthened by the institutional reform. While the introduction of the My Number system also objectively enhanced the detection capability of tax audits, we find no corresponding response in reported taxable income. These findings suggest that strengthening tax enforcement solely by improving the tax authority’s internal detection capability is insufficient in terms of generating deterrence against tax evasion.