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
Date Written: November 2, 2012
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: Suggested Citation