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The Effects of Income Windfalls on Labor Supply and Tax Compliance: Experimental Evidence

Author

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  • Miguel A. Fonseca
  • Lutfi Rahimi

Abstract

We examine the effect of cash windfalls on the supply of effort and tax compliance in a high stakes, real effort laboratory experiment. Income windfalls have a negative effect on effort, which mirrors existing evidence from the field. Tax compliance on labor income is only marginally affected by windfalls. When windfall income is taxable, we find a positive relationship between windfall size and compliance. We find no evidence that taxpayers switch from one type of evasion to the other as a function of whether windfalls are taxable or not. While compliance levels are lowest among the most productive, there are no differential effects of windfalls on compliance along the productivity dimension.

Suggested Citation

  • Miguel A. Fonseca & Lutfi Rahimi, 2022. "The Effects of Income Windfalls on Labor Supply and Tax Compliance: Experimental Evidence," Review of Behavioral Economics, now publishers, vol. 9(3), pages 185-221, September.
  • Handle: RePEc:now:jnlrbe:105.00000156
    DOI: 10.1561/105.00000156
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