How do firms' avoidance and evasion opportunities affect market prices? We investigate the causal link between tax-evasion opportunities and prices in a situation
where firms remit sales taxes and have access to tax-evasion possibilities. In light of
difficult causal identification with observational data, we design a controlled experiment in which buyers and sellers trade a fictitious good in competitive markets. A
per-unit tax is imposed on sellers, and sellers in the treatment group are provided
the opportunity to evade the tax whereas sellers in the control group are not. We
find that the equilibrium market price in the treatment group is lower than in the
control group, and the number of traded units is higher in treatment markets. The
results further show that the after-tax incomes of sellers increase through the evasion opportunity despite the lower prices. Our findings have implications for tax
incidence. We show that sellers with access to evasion shift a smaller share of the
nominal tax rate onto buyers relative to sellers without tax evasion opportunities.
In addition, we find that sellers with evasion opportunities shift the full amount of
their effective tax rate onto buyers. Additional experimental treatments show that
this full shifting of the effective tax burden is due to the evasion opportunity itself
rather than the evasion-induced lower effective tax rate.
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