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

Does the use of tax revenue matter for tax compliance behavior?

“…3 The donations are not targeted at a specific project. Doerrenberg and Duncan (2014) also donate lab revenue to the Red Cross.…”

“…For example,Alm, Jackson, and McKee (1992a) redistribute all tax payments among subjects,Fortin et al (2007) transfer paybacks to scientific research funds, andDoerrenberg and Duncan (2014) donate tax revenues to the Red Cross. Generally, in order to improve realism subjects in most lab experimental compliance studies are informed about the use of their tax payments.…”

Distributional Implications of Tax Evasion

“…Nonetheless, we take the differential effect of taxes on inequalities between panels A and B as additional evidence that the distributional impact of taxes is strongly determined by evasion. Additionally, the results in table B1 highlight that the elasticity of effort with respect to taxes is larger for the evading group relative to individuals who cannot evade (see Doerrenberg and Duncan [2012] for a more detailed discussion of this result). This finding suggests that access to evasion not only provides an extra margin along which to respond to varying tax rates, namely the evasion margin, but also increases the effort margin.…”

“…Alm (2012) provides a recent overview of the experimental tax evasion literature and Charness and Kuhn (2011) reviews the experimental labor supply literature. Doerrenberg and Duncan (2012) use the same experimental data as we do. 3.…”

“…5. The data used in this article rely on the same experiment used in Doerrenberg and Duncan (2012). They provide a more detailed overview of the experimental design.…”