How does firm tax evasion affect prices?

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