Distributional Implications of Tax Evasion: Evidence from the Lab

Indiana University School of Public & Environmental Affairs Research Paper No. 2012-10-02

22 Pages Posted: 11 Oct 2012 Last revised: 3 Nov 2012

See all articles by Philipp Dörrenberg

Philipp Dörrenberg

University of Mannheim; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); ZEW – Leibniz Centre for European Economic Research

Denvil Duncan

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA); Institute for the Study of Labor (IZA)

Date Written: November 2, 2012

Abstract

We study differences between actual and reported net income inequality in a laboratory experiment where participants first supply effort and then make a tax reporting decision. We show that for a group with relatively homogeneous levels of true gross income, 1) inequality in reported net incomes is higher than inequality in actual incomes and 2) higher taxes increase both types of inequality but have a larger effect on actual inequality. We decompose the effect of tax rates into a mechanical tax effect and two behavioral (effort and evasion) effects. Our results indicate that the mechanical and effort effects on actual inequality are larger than on observed inequality while the evasion effect is generally larger on observed inequality. We also find that the size of the effects, relative to each other, depends on the measure of income.

Keywords: Tax Evasion, Inequality, Lab Experiment, Taxes

JEL Classification: H23, H24, H26, D31

Suggested Citation

Dörrenberg, Philipp and Duncan, Denvil, Distributional Implications of Tax Evasion: Evidence from the Lab (November 2, 2012). Indiana University School of Public & Environmental Affairs Research Paper No. 2012-10-02, Available at SSRN: https://ssrn.com/abstract=2160528 or http://dx.doi.org/10.2139/ssrn.2160528

Philipp Dörrenberg

University of Mannheim ( email )

L 7, 3-5
Mannheim, 68161
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Munich
Germany

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Denvil Duncan (Contact Author)

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA) ( email )

1315 East Tenth Street
Bloomington, IN 47405
United States

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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