Location Matters: Insights from a Natural Field Experiment to Enhance Business Tax Compliance in Indonesia

Both theoretical and empirical research highlight the ambiguous relationship between business tax compliance and the geographic proximity of businesses to local tax offices. We investigate this issue using data from a Natural Field Experiment conducted in collaboration with Indonesia's tax authority, designed to assess the impact of behavioral nudges on the tax compliance of small and medium enterprises (SMEs). A total of 12,000 SMEs were randomly assigned to receive one of three treatment messages – emphasizing enforcement, providing information, or highlighting the use of tax revenue – or no message (control). We study compliance behavior over a 12-month period across diverse regions and varying distances from local tax offices. Enforcement messages significantly outperform other treatments, generating about US$29 in tax revenue for every dollar spent on mailing costs. We observe high compliance rates among non-treated SMEs near metropolitan tax offices and find that enforcement messages successfully raise compliance in non-metropolitan regions to comparable levels. However, targeting already compliant SMEs near metropolitan tax offices backfires, underscoring the need for geographically tailored tax administration strategies.

Mathias Sinning is a Professor of Economics at the ANU Crawford School of Public Policy. His research focuses on the application and extension of methods for treatment effect estimation and policy evaluation. He has published extensively in various domains of economics, including public economics, labour economics, health economics, development economics, and behavioural economics.