We study whether corruption influences tax evasion and whether the loss of resources in the public good can explain that effect if any. For this purpose, we plan to implement a tax evasion game with groups of four participants: three taking the role of taxpayers and one taking the role of official. All participants earn money in an initial stage where they perform an encoding task for 5 minutes. The taxpayers can lie about their earned income, and the official can take money from the collected taxes. In order to identify the causal effect of corruption on tax evasion, taxpayers will be informed about the level of corruption in their group before they make the reporting decision. The money collected for taxes is augmented by an efficiency factor and is transferred to the organization Keep Britain Tidy which is a real public good for UK residents. If an official decides to take money from the collected taxes, that generates a loss of resources in the public good.
In the case of the officials, after they earn their income, they decide whether they want to take a fixed amount of £0.63 from the taxes collected. We gather the taking decisions of the officials and create two groups, one with low corruption (fewer officials in the group that decided to take) and one with high corruption (majority of officials in the group that decided to take). In the case of the taxpayers, after they earn their income, they are informed about the type of group where the official they are matched with comes from (low/high corruption), and then they are asked to report their income for taxation. The income reported is taxed at a rate of 35%.
We plan to implement treatment variations to disentangle whether the effect of corruption on tax evasion, if any, is explained by the loss of resources in the public good that corruption generates or just by having a corrupt administration in place. For this, we will implement two more treatments (low/high lottery) where the officials instead of actively deciding whether to take the £0.63, a lottery will randomly determine whether they win £0.63 or not. In this sense, the same loss of resources occurs but the cause differs in comparison to the treatments where they actively decided whether to take the money.
Final payments are as follows: officials’ payoff is their earned income plus £0.63 if they decide to take it or if the lottery assigns it to them, otherwise, the payoff is only their earned income. And taxpayers’ payoff is their earned income minus 35% of their reported income.
The experiment will be neutrally framed, which implies that participants’ roles will be labeled as Participant A for officials and Participant B for taxpayers.
From hereafter, the names of the treatments where there are high/low levels of corruption given the decision to take of the officials will be Choice-High and Choice-Low. The names of the treatments where a lottery determines if an official takes or not will be Random-High and Random-Low.
H1: The evasion rate will be higher in Choice-High than in Choice-Low.
H2: The evasion rate will be higher in Choice-High than in Random-High.
H3: The evasion rate will be higher in Random-High than in Random-Low.
H4: The evasion rate will be equal in Choice-Low than in Random-Low.
Secondary Hypothesis on appropriateness rates
H1: Individuals will consider it more socially appropriate to evade taxes in Choice-High than in Choice-Low.
H2: Individuals will consider it more socially appropriate to evade taxes in Choice-High than in Random-High.
H3: Individuals will consider it more socially appropriate to evade taxes in Random-High than in Random-Low.
H4: Individuals will consider it equally socially appropriate to evade taxes in Choice-Low than in Random-Low.
Note: In version 1 of this pre-registration we do not know the exact distribution of the Public officials for High/Low treatments. The distribution will depend on the decisions of Public officials in the Choice treatment.