Tax policy levers and taxpayer decision-making. Insights from a laboratory experiment on an evolutionary model of income tax evasion decisions

An evolutionary game provides a parsimonious benchmark for repeated interactions between tax authorities and taxpayers in income-tax evasion decisions. The model relaxes the assumption of fully rational, forward-looking agents and characterizes the stationary shares of inspection and full compliance through payoff comparisons. It predicts that lower tax rates and higher penalties are associated with a larger share of fully honest taxpayers. A laboratory experiment from the taxpayers' perspective examines how tax-authority policy instruments affect decisions across repeated rounds. Consistent with the model's comparative statics, a higher tax rate is associated with a lower probability of full honesty, whereas a higher penalty rate is associated with a higher probability of full honesty. The data also show patterns consistent with experience-based adjustment, including lower compliance after an audit, a pattern commonly labeled the “bomb-crater effect”. Because subjective beliefs were not elicited, we frame these behavioral mechanisms as interpretations of the observed patterns rather than as directly identified psychological channels.