Experimental evidence on the relationship between tax evasion opportunities and labor supply

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu Motivated by the observation that access to evasion opportunities is distributed heterogeneously across the labor market, this paper examines the extent to which labor supply elasticities with respect to tax rates depend on such evasion opportunities. We first set up a theoretical model to formally show that labor supply responses depend on access to evasion. The model is then tested in a lab experiment in which all participants undertake a real-effort task over several rounds. Subjects face a tax rate, which varies across rounds and are required to pay taxes on earned income. The treatment group is given the opportunity to underreport income while the control group is not. We find zero labor effort responses to tax rates in the control group and positive statistically significant adjustments in the treatment group; suggesting that both groups indeed react differently to taxes. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E S

Tax aversion in labor supply

“…Much of this literature examines the effect of taxes, which may or may not be salient and may or may not be complex, on workers who must calculate their net wage from their gross wage and the tax schedule (e.g., Swenson, 1988;Blumkin et al, 2012;Hayashi et al, 2013;Weber and Schram, 2013;Doerrenberg and Duncan, 2014;Abeler and Jager, 2015). 4 Other research examines labor supply responses to net-of-tax wages without explicit mention of taxes (Sillamaa, 1998(Sillamaa, , 1999a.…”

Problematic response margins in the estimation of the elasticity of taxable income

“…Some of the early studies, as Clotfelter (1983), find increased tax evasion for higher marginal tax rates. More recently, Nevertheless, it seems that the self-employment ETI literature (Heim, 2010;Doerrenberg and Duncan, 2014) adopt a perspective where reported income is increasing in the net-of-tax rate, i.e., that tax evasion is increasing in the marginal tax rate. This means that ETI estimates for the self-employed are larger than for wage earners if there is a discernible effect on tax evasion from the change in the marginal tax rate.…”

Audit Publicity and Tax Compliance: A Natural Experiment

“…For example, it is estimated that closing the tax gap would provide additional resources corresponding to approximately 60 percent of the UK 2013 budget deficit, 155 percent of the US 2006 budget deficit, and 180 percent of the Italian 2015 budget deficit . There is also evidence that tax evasion affects allocative efficiency by influencing market prices (Kopczuk et al ., ) and the elasticity of labor supply to tax rate changes (Doerrenberg and Duncan, ). While precise measures of tax evasion are not available for all countries, it is generally accepted that tax evasion is widespread and that it is a major problem especially in developing countries.…”

“…deficit. 1 There is also evidence that tax evasion affects allocative efficiency by influencing market prices (Kopczuk et al, 2016) and the elasticity of labor supply to tax rate changes (Doerrenberg and Duncan, 2014). While precise measures of tax evasion are not available for all countries, it is generally accepted that tax evasion is widespread and that it is a major problem especially in developing countries.…”