Framing and salience effects in tax evasion decisions – An experiment on underreporting and overdeducting

Using different controlled and incentivized experiments, we analyze whether taxpayers are more willing to evade taxes by underreporting positive income (e.g., business or nonbusiness income) than by overdeducting negative income (e.g., deductions, credits, or losses). We robustly observe an asymmetric tax evasion behavior. Specifically, individuals are less compliant in case of positive income. This result is robust to a variation in which the after-tax payoffs from the cases with positive and negative income are offset against each other – even though offsetting reduces the asymmetric effect significantly. In an experimental environment in which the interaction of positive and negative income reporting is made very saliently and in which we consequently expect that subjects decide on both tax evasion decisions jointly, the asymmetric effect vanishes. We therefore provide evidence that (1) tax evasion behavior is asymmetrically in case of positive and negative income reporting, (2) offsetting reduces this asymmetric effect and (3) the salience of income interaction plays an important role in tax evasion decisions.