The Effects of Increased Monitoring on High Wealth Individuals: Evidence from a Quasi-Natural Experiment in Indonesia

This study leverages a quasi-natural experiment – in 2009, Indonesia established a tax office for high wealth individuals (HWI), increasing the audit probability and monitoring of around 1,200 rich taxpayers in Jakarta. Using 141,097 de-identified 2006–2012 individual tax return records, we develop a set of counterfactuals to assess the post- and pre-treatment differences between the treated (monitored) taxpayers and their synthetic control groups. Our results indicate that although post-treatment declaration of taxable and earned income and income tax increased substantially, the effect is short-lived. The increase in earned income is relatively larger than taxable income, suggesting that monitored individuals exert effort to reduce tax payments. Furthermore, we identified a comparable positive spillover effect on income declaration for non-treated taxpayers residing in Jakarta who met the HWI criteria. Lastly, we demonstrate that the spillover effects drastically decrease as the dissimilarity of financial characteristics (income & wealth) to the targeted population increase.