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.