Cash and the Hidden Economy: Laboratory and Artefactual Field Experimental Evidence on Fighting Tax Evasion in Small Business Transactions

Ho Fai Chan, Uwe Dulleck, Jonas Fooken, Naomi Moy and Benno Torgler

CREMA Working Paper Series from Center for Research in Economics, Management and the Arts (CREMA)

Abstract: Increasing the tax compliance of self-employed business owners (particularly of trade- specific service providers) remains an ongoing challenge for tax authorities. From a compliance point of view, cash transactions are particularly problematic when services are paid for on the spot, as such exchanges are difficult to audit. As a novelty we present experimental evidence testing 11 different policy strategies in a setting that allows for cash transactions. Our sample includes both students and non-students active in service industries characterised by the opportunity to engage in cash transactions. While our results offer a positive outlook for the interventions reporting a significant effect, they particularly speak to the potential of moral suasion to increase compliance, as it may be implemented at relatively low cost. However, a carrot (offering support in tax declarations) as well as a stick (increasing the threat of audits) approach may be promising for increased compliance, especially where there is an evasion opportunity in cash-for-service payments between small businesses and individual customers who may share a common benefit from tax evasion. A stick approach is particularly efficient for those inclined to use cash transactions.

Date: 2021-01
New Economics Papers: this item is included in nep-acc, nep-exp, nep-iue, nep-pay and nep-sbm
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