Review of Behavioral Economics > Vol 9 > Issue 3

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

Miguel A. Fonseca, University of Exeter, UK, and NIPE, Universidade do Minho, Portugal, m.a.fonseca@exeter.ac.uk , Lutfi Rahimi, American University of Afghanistan and Biruni Institute, Afghanistan, lutfira@gmail.com
 
Suggested Citation
Miguel A. Fonseca and Lutfi Rahimi (2022), "The Effects of Income Windfalls on Labor Supply and Tax Compliance: Experimental Evidence", Review of Behavioral Economics: Vol. 9: No. 3, pp 185-221. http://dx.doi.org/10.1561/105.00000156

Publication Date: 26 Sep 2022
© 2022 M. A. Fonseca and L. Rahimi
 
Subjects
Behavioral Economics,  Experimental Economics,  Labor Economics: Labor Supply,  Public Economics: Public Finance,  Taxation
 
Keywords
JEL Codes: C91, J20, H24, H26
Cash windfallsreal efforttax complianceexperiments
 

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In this article:
1. Introduction 
2. Experimental Design and Procedures 
3. Results 
4. Discussion 
5. Conclusion 
Appendix 
References 

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.

DOI:10.1561/105.00000156