The Excess Burden of Tax Evasion: An Experimental Detection-Concealment Contest

We present an experimental study on the wasted resources associated with tax evasion. This waste arises from taxpayers and tax authorities, investing costly effort in concealment, respectively detection, of tax evasion. We show that (socially inefficient) efforts depend positively on the prevailing tax rate, but not on the fine which is imposed in case of detected tax evasion. The frequency of evasion increases with tax rates. Additionally, we observe less tax evasion than a model with risk neutral taxpayers predicts. We find evidence that this is rather due to individual moral constraints than due to risk aversion.