Essays on tax evasion: Insights from experimental and survey research

Abstract

This doctoral thesis consists of three independent research papers dealing with tax evasion, both from an experimental and empirical (survey) perspective. The first paper is co-authored with Florian Misch (ZEW) and Biger Nerré (GIZ) and addresses the major weakness of measuring tax evasion through business and household surveys, namely the reluctance of respondents to answer truthfully due to the threat of disclosure. First, we assess the merits of a novel questioning method to gather information about tax evasion by means of business surveys. This approach allows estimating the prevalence of tax evasion, but it does not allow identifying whether the individual firm engages in tax eva? sion or not, therefore providing incentives for survey participants to answer truthfully. Second and contrary to most other business surveys, we differentiate between two common modes of tax evasion, namely underreporting of sales and informal supplements to official wages (‘envelope wages’). Using evidence from Serbia, we show that the estimated share of firms which un? derreport sales and wages, respectively, by at least 10% is higher under the crosswise model compared to the case when conventional questioning methods applied in business surveys such as the World Bank Enterprise Surveys are used. However, the difference is only significant with respect to sales. These results appear to be robust to a number of modifications, and we explore various potential causes that lead to these results. The second paper (co-authored with Christoph Bühren, University of Kassel) uses a real effort experiment to analyze the dependence of tax evasion on the amount of effort invested to generate income. In three treatments, subjects were either endowed with income or had to work moderately or arduously to earn it. In line with prospect theory, subjects evaded more taxes when they worked hard for their income. We find little evidence for the prediction that tax evasion in the endowed treatment is higher than that in the moderate-effort treatment. The third paper again investigates the merits of using surveys to study tax evasion. In particular, many surveys on sensitive topics such as tax evasion suffer from the reluctance of respondents to provide truthful answers which can cause downward-biased estimates. This paper addresses this problem by making use of a recent survey method (Crosswise Model) designed to provide positive incentives for respondents to answer sensitive questions more truthful. We extend the Crosswise Model by applying the so-called “Benford Illusion” which allows us to increase the precision of the Crosswise Model that is less statistically efficient than other methods. To test the effectiveness of the model in providing privacy protection, we carried out an online survey in which the respondents were randomly allocated into two splits differing only by the questioning technique applied. Our results suggest that the Crosswise Model can help to increase privacy protection compared to a simple direct questioning approach. As a consequence, survey estimates of tax evasion using the Crosswise Model are likely to become more valid. At the same time, we show that were able to obtain an efficient estimator without substantially decreasing privacy protection, even for a relatively small sample size.