Experimental Evidence on the Relationship between Tax Evasion Opportunities and Labor Supply

54 Pages Posted: 20 Oct 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)

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Abstract

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 discuss the channels through which access to evasion affects labor supply responses and then set up a laboratory 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 that participants in the treatment group have significantly larger effort responses to changes in the net-of-tax rate than participants in the control group; suggesting that both groups indeed react differently to taxes.

Keywords: lab experiment, taxable income, labor supply, tax evasion, taxes

JEL Classification: H21, H24, H26, J22

Suggested Citation

Dörrenberg, Philipp and Duncan, Denvil, Experimental Evidence on the Relationship between Tax Evasion Opportunities and Labor Supply. IZA Discussion Paper No. 6914, Available at SSRN: https://ssrn.com/abstract=2164643 or http://dx.doi.org/10.2139/ssrn.2164643

Philipp Dörrenberg (Contact Author)

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

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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