The Effects of Income Windfalls on Labor Supply and Tax Compliance: Experimental Evidence

Miguel Fonseca and Lutfi Rahimi

Review of Behavioral Economics, 2022, vol. 9, issue 3, 185-221

Abstract: We examine the effect of cash windfalls on the supply of effort and tax compliance in a high stakes, real effort laboratory experiment. Income windfalls have a negative effect on effort, which mirrors existing evidence from the field. Tax compliance on labor income is only marginally affected by windfalls. When windfall income is taxable, we find a positive relationship between windfall size and compliance. We find no evidence that taxpayers switch from one type of evasion to the other as a function of whether windfalls are taxable or not. While compliance levels are lowest among the most productive, there are no differential effects of windfalls on compliance along the productivity dimension.

Keywords: Cash windfalls; real effort; tax compliance; experiments (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlrbe:105.00000156

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