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

  • Philipp Doerrenberg

    (University of Cologne)

  • Denvil Duncan

    (Indiana University)

We examine the extent to which labor supply elasticities with respect to tax rates depend on access to evasion opportunities. It is observed that some types of workers have the opportunity to hide their income while others do not have such opportunities, e.g. due to being subject to third-party-reporting. We first set up a theoretical model to formally show that labor supply responses depend on access to evasion. The model is then tested in a lab 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 zero labor effort responses to tax rates in the control group and positive statistically significant adjustments in the treatment group; suggesting that both groups indeed react differently to taxes.

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Paper provided by Cologne Graduate School in Management, Economics and Social Sciences in its series Cologne Graduate School Working Paper Series with number 03-10.

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Date of creation: 18 Sep 2012
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Handle: RePEc:cgr:cgsser:03-10
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