Local incentives and national tax evasion: The response of illegal mining to a tax reform in Colombia

Achieving a fair distribution of resources is one of the goals of fiscal policy. To this end, governments often transfer tax resources from richer to more marginalized areas. In the context of mining in Colombia, we study whether lower transfers to the locality where the taxed economic activity takes place dampen local authorities’ incentives to curb tax evasion. Using machine learning predictions on satellite imagery to identify mines allows us to overcome the challenge of measuring evasion. Employing difference-in-differences strategies, we find that reducing the share of revenue transferred back to mining municipalities leads to an increase in illegal mining. This result highlights the difficulties inherent in adequately redistributing tax revenues.