The Bright Side of Tax Evasion

53 Pages Posted: 3 Feb 2022

See all articles by Cornelius Schneider

Cornelius Schneider

University of Mannheim; Friedrich-Schiller-Universit├Ąt Jena

Wladislaw Mill

University of Mannheim - Department of Economics

Date Written: February 2, 2022

Abstract

This paper presents, to our knowledge, the first empirical investigation if tax evasion might be desirable for an optimal income tax schedule. More specifically: Does the opportunity to evade taxes eventually even increase tax revenues? Resuscitating the intriguing conclusions by the theoretical work on "randomized taxation", we test the hypothesis that incentives to evade partially offset the undesirable distortions of taxes on labor supply. Importantly, in exploiting behavioral responses, the proposed mechanism increases tax revenues beyond what an equivalent decrease in nominal rates would achieve. We implemented an original real effort experiment in a true (online) labor market with nearly 1,000 participants. Our findings show significant positive labor supply responses to the opportunity to evade (increased labor supply by 37%). More importantly, the expected tax revenue significantly and substantially increased by up to more than 50%. Strikingly, this effect persists when comparing effective tax rates: Lowering effective tax rates through the opportunity to evade is more efficient than simply lowering statutory tax rates. Since this effect is most pronounced for low wages, our work also contributes to the literature on optimal tax administration: Facing limited resources, tax enforcement should focus on high income individuals in non-rigid labor markets.

Keywords: Tax Evasion, Tax Revenues, Labor Supply, Optimal Taxation, Experiment

JEL Classification: H21, H24, H26, J22, C91

Suggested Citation

Schneider, Cornelius and Mill, Wladislaw, The Bright Side of Tax Evasion (February 2, 2022). Available at SSRN: https://ssrn.com/abstract=4024275 or http://dx.doi.org/10.2139/ssrn.4024275

Cornelius Schneider (Contact Author)

University of Mannheim ( email )

D-68131 Mannheim
Germany

HOME PAGE: http://https://www.vwl.uni-mannheim.de/schneider/

Friedrich-Schiller-Universit├Ąt Jena ( email )

Germany

Wladislaw Mill

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
39
Abstract Views
206
PlumX Metrics