Joel Slemrod praises Finnish research and collaboration with Finnish authorities

In an open letter to Finnish audience, distinguished American tax economist professor Joel Slemrod commends the quality of Finnish research in public finance and research collaboration with Finnish authorities. He also encourages Finnish authorities to be more innovative about using third party information in tax enforcement and using experiments in general to evaluate different policies.

Joel Slemrod at IIPF 2018
Photo: Saara Pakaslahti

In his open letter, Professor Joel Slemrod reflects on a recent research project with Finnish economists Jarkko Harju (VATT Institute for Economic Research) and Tuomas Kosonen (Labour Institute for Economic Research). In the project, they examined the use of third-party information to capture the extent of tax evasion and to encourage tax compliance.

- [U]sing third-party information and informing taxpayers about its existence seem to be very effective in limiting tax evasion. From the point of view of the tax authorities, it is also much more cost-effective than, for example, increasing the audit rate, Joel Slemrod concludes.

In the project, they looked at tax evasion associated with used car imports. By comparing mileage reported in tax declarations with odometer readings recorded by inspectors, they found that about 10% of used cars imported had evaded mileage-based taxes. 

In cooperation with the researchers, Finnish Customs carried out a randomized control trial (RCT), where randomized groups of car importers were sent letters informing them that the Customs received third-party information on mileage relating to tax evasion from car inspectors. The letters were effective in reducing tax evasion.

Often third-party information is already collected for some non-tax reason, such as car inspections in this case. Thus, using third-party information does not incur much costs for the authorities. Whereas, increasing the number of audits usually induces much higher costs, e.g. in terms of hiring more auditors.  

- Based on the results from this project and my other research, I encourage Finnish authorities to consider collecting third-party information from all sources of taxable income. […] being innovative about how to collect and make use of third-party information is a policy worth considering.

Read Professor Joel Slemrod's open letter.

Joel Slemrod’s article “Missing Miles: Evasion Responses to Car Taxes” co-authored with Jarkko Harju and Tuomas Kosonen has now been accepted for publication in the Journal of Public Economics. The research results have been published in the VATT Working Papers series: http://urn.fi/URN:ISBN:978-952-274-242-1