Inequitable wages and tax evasion

In a two-stage lab experiment, we examine whether wage inequity has a greater impact on tax compliance and on the beliefs about peers’ compliance levels among the wronged when it results from intentional human choice versus a random mechanism. Subjects are organized into groups of six. In the first stage, we perform a wage inequity manipulation by assigning equitable or inequitable wages to subjects as remuneration for a real-effort task. In the second stage, subjects are prompted to report their incomes, of which a certain percent is deducted but not redistributed between them. Then, subjects state their incentivized beliefs about the mean of the declared-to-true income ratio among their group members. We find that tax compliance and beliefs are eroded when wage inequity stems from intentional human choice but not when it is due to randomness. Consequently, it is not inequity per se that reduces tax compliance and corrupts beliefs, but rather when inequity is due to a human choice. Our results demonstrate that incidental unfairness in the form of intentional wage inequity adversely affects tax compliance and beliefs about peers’ compliance levels. In conclusion, intentional wage inequity can be harmful for society.