Bearing the burden — Implications of tax reporting institutions on evasion and incidence

Kaisa Kotakorpi; Tuomas Nurminen; Topi Miettinen; Satu Metsälampi

doi:10.1016/j.jebo.2024.01.021

Bearing the burden — Implications of tax reporting institutions on evasion and incidence

Kaisa Kotakorpi
, Tuomas Nurminen
, Topi Miettinen
, Satu Metsälampi^*

^*Corresponding author for this work

Business Studies

Research output: Contribution to journal › Article › Scientific › peer-review

2 Citations (Scopus)

18 Downloads (Pure)

Abstract

We investigate effects of tax reporting institutions on evasion and incidence using an experimental double auction market. We find that 28% of the sellers are truthful when only sellers report, but that 88% and 64% of them are truthful under costless and costly third-party reporting by buyers, respectively. Reporting behavior therefore responds to the intensity of deterrence. However, we find that prices do not fully reflect the lower taxes of the evaders. Thus, when sellers can unilaterally evade taxes, tax incidence deviates from the prediction of the standard model, and there is deadweight loss even if tax revenue is low. Pricing, incidence, and reporting patterns in all treatments are consistent with a model with heterogeneous lying costs, or a combination of lying costs and image concerns that give rise to a motivation to appear honest.

Original language	English
Pages (from-to)	81-134
Number of pages	54
Journal	Journal of Economic Behavior and Organization
Volume	220
DOIs	https://doi.org/10.1016/j.jebo.2024.01.021
Publication status	Published - Apr 2024
Publication type	A1 Journal article-refereed

Funding

We thank A. Brockmeyer, J. Harju, M. Hovi, P.H. Matthews, G. Van Moer, J. Slemrod, J. Sobel, and audiences at Helsinki GSE, MaTax, M-BEPS, MiddExLab Virtual Seminar, NCBEE, Stockholm School of Economics, VSE Prague, IIPF Congress 2019 and ZEW Public Finance 2021 for helpful discussions. We also thank P. Doerrenberg and D. Duncan for kindly sharing their z-Tree code with us and the PCRClab at the U of Turku for hospitality. Kotakorpi gratefully acknowledges financial support from the Research Council of Finland (grant nos. 277283 and 346250 ), Metsälampi from the Finnish Cultural Foundation (grant no. 00180719 ), Miettinen from the Yrjö Jahnsson Foundation (grant no. 20197200 ), Nurminen from the Emil Aaltonen Foundation (grant no. 190171 ), the Society of Swedish Literature in Finland (grant no. 1581 ), and the Yrjö Jahnsson Foundation (grant nos. 20177015 and 20197206 ). We thank A. Brockmeyer, J. Harju, M. Hovi, P.H. Matthews, G. Van Moer, J. Slemrod, J. Sobel, and audiences at Helsinki GSE, MaTax, M-BEPS, MiddExLab Virtual Seminar, NCBEE, Stockholm School of Economics, VSE Prague, IIPF Congress 2019 and ZEW Public Finance 2021 for helpful discussions. We also thank P. Doerrenberg and D. Duncan for kindly sharing their z-Tree code with us and the PCRClab at the U of Turku for hospitality. Kotakorpi gratefully acknowledges financial support from the Research Council of Finland (grant nos. 277283 and 346250), Metsälampi from the Finnish Cultural Foundation (grant no. 00180719), Miettinen from the Yrjö Jahnsson Foundation (grant no. 20197200), Nurminen from the Emil Aaltonen Foundation (grant no. 190171), the Society of Swedish Literature in Finland (grant no. 1581), and the Yrjö Jahnsson Foundation (grant nos. 20177015 and 20197206).

Funders	Funder number
MiddExLab Virtual Seminar
NCBEE
Strategic Research Council at the Research Council of Finland	346250, 277283
Stockholm School of Economics
Yrjö Jahnssonin säätiö	20197200
Suomen Kulttuurirahasto	00180719
Emil Aaltosen Säätiö	190171
Svenska litteratursällskapet i Finland	20177015, 20197206, 1581

Keywords

Double auction
Experiment
Social image
Tax evasion
Tax incidence
Third-party reporting

Publication forum classification

Publication forum level 2

ASJC Scopus subject areas

Economics and Econometrics
Organizational Behavior and Human Resource Management

Access to Document

10.1016/j.jebo.2024.01.021Licence: CC BY

Bearing the burden — Implications of tax reporting institutions on evasion and incidenceFinal published version, 5.49 MBLicence: CC BY

https://urn.fi/URN:NBN:fi:tuni-202404173655Licence: CC BY

Cite this

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title = "Bearing the burden — Implications of tax reporting institutions on evasion and incidence",

abstract = "We investigate effects of tax reporting institutions on evasion and incidence using an experimental double auction market. We find that 28\% of the sellers are truthful when only sellers report, but that 88\% and 64\% of them are truthful under costless and costly third-party reporting by buyers, respectively. Reporting behavior therefore responds to the intensity of deterrence. However, we find that prices do not fully reflect the lower taxes of the evaders. Thus, when sellers can unilaterally evade taxes, tax incidence deviates from the prediction of the standard model, and there is deadweight loss even if tax revenue is low. Pricing, incidence, and reporting patterns in all treatments are consistent with a model with heterogeneous lying costs, or a combination of lying costs and image concerns that give rise to a motivation to appear honest.",

keywords = "Double auction, Experiment, Social image, Tax evasion, Tax incidence, Third-party reporting",

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doi = "10.1016/j.jebo.2024.01.021",

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AU - Kotakorpi, Kaisa

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AU - Metsälampi, Satu

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N2 - We investigate effects of tax reporting institutions on evasion and incidence using an experimental double auction market. We find that 28% of the sellers are truthful when only sellers report, but that 88% and 64% of them are truthful under costless and costly third-party reporting by buyers, respectively. Reporting behavior therefore responds to the intensity of deterrence. However, we find that prices do not fully reflect the lower taxes of the evaders. Thus, when sellers can unilaterally evade taxes, tax incidence deviates from the prediction of the standard model, and there is deadweight loss even if tax revenue is low. Pricing, incidence, and reporting patterns in all treatments are consistent with a model with heterogeneous lying costs, or a combination of lying costs and image concerns that give rise to a motivation to appear honest.

AB - We investigate effects of tax reporting institutions on evasion and incidence using an experimental double auction market. We find that 28% of the sellers are truthful when only sellers report, but that 88% and 64% of them are truthful under costless and costly third-party reporting by buyers, respectively. Reporting behavior therefore responds to the intensity of deterrence. However, we find that prices do not fully reflect the lower taxes of the evaders. Thus, when sellers can unilaterally evade taxes, tax incidence deviates from the prediction of the standard model, and there is deadweight loss even if tax revenue is low. Pricing, incidence, and reporting patterns in all treatments are consistent with a model with heterogeneous lying costs, or a combination of lying costs and image concerns that give rise to a motivation to appear honest.

KW - Double auction

KW - Experiment

KW - Social image

KW - Tax evasion

KW - Tax incidence

KW - Third-party reporting

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Bearing the burden — Implications of tax reporting institutions on evasion and incidence

Abstract

Funding

Keywords

Publication forum classification

ASJC Scopus subject areas

Access to Document

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