And Justice for All : Responses to Taxation in a Real Effort Task Experiment

In this paper we study taxpayers’ behavior when confronted to different levels of tax rates in the lab. Using the decisions on the exerted effort and/or the declared tasks we also test the existence of a Laffer curve. We implemented a 2x2 design, combining the im/possibility of evading taxes and playing with an automata/real person who determines the applied tax rate (exogenous vs. endogenous tax rates). Although the state’s revenues do not generate a pure Laffer curve, we found an intuitive Laffer curve that complies with the social norm. In addition, our results suggest that taxpayers respond to higher tax rates in two ways: by reducing their effort (i.e., working less) and by evading taxes when they can do so. We also find that more loss-averse subjects evade less and individuals who are more (negatively) reciprocal have a greater probability of evading taxes, when they play against a partner in the room. Finally, older subjects evade with a lower probability, whilst females evade more only when the tax rate is decided by another person