Tax Evasion, Welfare Fraud, and "The Broken Windows" Effect: An Experiment in Belgium, France and the Netherlands

In a series of experiments conducted in Belgium (Wallonia and Flanders), France and the
Netherlands, we compare behavior regarding tax evasion and welfare dodging, with and
without information about others’ behavior. Subjects have to decide between a ‘registered’
income, the realization of which will be known to the tax authority for sure, and an
‘unregistered’ income that will only be known with some probability. This unregistered income
comes from self-employment in the Tax treatment and from black labor supplementing some
unemployment compensation in the Welfare treatment. Subjects have then to decide on
whether reporting their income or not, knowing the risk of detection. The results show that (i)
individuals evade more in the Welfare treatment than in the Tax treatment; (ii) many subjects
choose an option that allows for tax evasion or welfare fraud but report their income honestly
anyway; (iii) examples of low compliance tend to increase tax evasion while examples of high
compliance exert no influence; (iv) tax evasion is more frequent in France and the
Netherlands; Walloons evade taxes less than the Flemish. There is no cross-country
difference in welfare dodging.