Cash and the Hidden Economy: Laboratory and Artefactual Field Experimental Evidence on Fighting Tax Evasion in Small Business Transactions

61 Pages Posted: 2 Mar 2021

See all articles by Ho Fai Chan

Ho Fai Chan

Queensland University of Technology

Uwe Dulleck

Queensland University of Technology - School of Economics and Finance

Jonas Fooken

University of Queensland

Naomi Moy

University of Bolgona

Benno Torgler

Queensland University of Technology; CREMA; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: January 7, 2021

Abstract

Increasing the tax compliance of self-employed business owners (particularly of trade-specific service providers) remains an ongoing challenge for tax authorities. From a compliance point of view, cash transactions are particularly problematic when services are paid for on the spot, as such exchanges are difficult to audit. As a novelty we present experimental evidence testing 11 different policy strategies in a setting that allows for cash transactions. Our sample includes both students and non-students active in service industries characterised by the opportunity to engage in cash transactions. While our results offer a positive outlook for the interventions reporting a significant effect, they particularly speak to the potential of moral suasion to increase compliance, as it may be implemented at relatively low cost. However, a carrot (offering support in tax declarations) as well as a stick (increasing the threat of audits) approach may be promising for increased compliance, especially where there is an evasion opportunity in cash-for-service payments between small businesses and individual customers who may share a common benefit from tax evasion. A stick approach is particularly efficient for those inclined to use cash transactions.

Keywords: Experiment, Cash transaction, Tax Evasion

JEL Classification: H26, C93, C91

Suggested Citation

Chan, Ho Fai and Dulleck, Uwe and Fooken, Jonas and Moy, Naomi and Torgler, Benno, Cash and the Hidden Economy: Laboratory and Artefactual Field Experimental Evidence on Fighting Tax Evasion in Small Business Transactions (January 7, 2021). Available at SSRN: https://ssrn.com/abstract=3761506 or http://dx.doi.org/10.2139/ssrn.3761506

Ho Fai Chan (Contact Author)

Queensland University of Technology ( email )

2 George Street
Brisbane, Queensland 4000
Australia

Uwe Dulleck

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

Jonas Fooken

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Naomi Moy

University of Bolgona ( email )

Piazza Scaravilli 2
Bologna, 40100
Italy

Benno Torgler

Queensland University of Technology ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

CREMA

Gellertstrasse 18
Basel
Zurich, CH 8006
Switzerland

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

Poschinger Str. 5
Munich, DE-81679
Germany

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