Disrupting Compliance: The Impact of a Randomized Tax Holiday in Uruguay

What is the effect of disrupting tax compliance? In a context of substantial nonpayment, the municipal government in Montevideo, Uruguay sought to reward punctual taxpayers by raffling tax holidays at random to them. Using individual payment records as an unobtrusive outcome measure, we combine natural, field, and survey experiments to study the effects. Contrary to the policy’s aims, winning a tax holiday reduced tax compliance on average for two years after the interruption of payments. Our evidence suggests that the negative effect arose because the holiday disrupts the habit of paying taxes. Our findings provide broader insights into behavioral foundations of compliance while also suggesting effective policy modifications to address an abiding challenge for governments: the raising of revenue.