Tax Incidence in the Presence of Tax Evasion

Time: Friday, November 9, 2018 12:00-13:30

Location: Room 610, Mingde Main Building

Speaker: Denvil Duncan

Host: Zhang Jing

This paper studies the economic incidence of sales taxes in the presence of tax evasion opportunities. We design a laboratory experiment in which buyers and sellers trade a fictitious good in double auction markets. A per-unit tax is imposed on sellers, and sellers in the treatment group are provided the opportunity to evade the tax whereas sellers in the control group are not. We find that the market equilibrium price in the treatment group is lower than in the control group. This difference is economically and statistically significant, and implies that sellers with access to evasion shift a smaller share of the nominal tax rate onto buyers relative to sellers without tax evasion opportunities. Interestingly, we find that sellers with evasion opportunities shift the full amount of their effective tax rate onto buyers. Additional experimental treatments show that the full shifting of the effective tax burden is due to the evasion opportunity itself rather than the evasion-induced lower effective tax rate.

Denvil Duncan is an Associate Professor at School of Public and Environmental Affairs at Indiana University Bloomington. His primary research focuses on the causes and consequences of tax evasion. His research has explored the impact of tax evasion opportunities on income inequality, labor supply, risk taking behavior, and tax incidence. He has also written on the subjects of shadow economic activity, tax morale, and tax competition, with his work published in top journals such as the European Economic Review, Journal of Economic Behavior and Organization, National Tax Journal, and International Tax and Public Finance.