Exploring the Nexus of Detection Probability, Financial Disclosure, and Tax Compliance: Evidence from Indonesia’s VDP

• In Event: Households and Behavioral Responses in Developing Countries

Abstract

This study investigates the impact of deterrence letters on financial disclosure among individual taxpayers in Indonesia. Leveraging over 14 million individual taxpayer-year observations from 2016 to 2022, I apply a difference-in-differences and quantile regression identification strategy to compare outcomes between recipients of targeted deterrence letters and those issued standard general letters. The study focuses on heterogeneous treatment effects across asset and income distributions under a voluntary disclosure programme (VDP) setting.

The results show that deterrence letters significantly increase reported total assets by 13%, net assets by 22%, and net income by 2.2%, suggesting that taxpayers respond to increased perceived probability of detection by improving financial disclosure. These behavioural adjustments are most pronounced for verifiable indicators, such as asset declarations, consistent with theories of third-party reporting and self-enforcement. Paradoxically, reported income tax liabilities decline, likely reflecting temporary post-pandemic rate reductions rather than evasion.

High-wealth individuals exhibit greater responsiveness, indicating that enforcement grounded in third-party information is particularly effective among affluent taxpayers. In contrast, smaller responses among low-asset individuals suggest persistent evasion or limited reach of deterrence tools in this group. Robustness checks confirm the validity of our estimates across alternative specifications.

These findings underscore the importance of integrating deterrence with facilitative measures, such as withholding schemes and VDP, to enhance compliance across taxpayer segments. The study contributes to the literature on tax enforcement by providing large-scale empirical evidence on how behavioural responses vary by taxpayer profile, offering practical insights for designing more effective and equitable tax administration strategies in developing economies.

Author

• Bagus Suyanto, bsuyanto1@sheffield.ac.uk