Tax Evasion and Charitable Giving—An Experimental Approach∗

The paper introduces tax evasion through subsidies due to false declarations of charitable donations. The study distinguishes between a rebate and match subsidy in an experimental setting. Under the rebate subsidy the individual gets the subsidy, while under the match subsidy the charity organization gets the subsidy. First, I develop a theoretical model of charitable giving and tax evasion. Second, I test in an experiment whether subjects report higher donations than the actual donations they made, and thus evade taxes. The results show that the level of overreporting is higher under the rebate subsidy than under the match subsidy. An increase in the subsidy rate leads to less overreporting of donations. A higher probability of an audit under the rebate subsidy has no significant effect on overreporting, whereas a higher probability under the match has a strong negative effect. The results of the paper provide new insights for policymakers to implement effective subsidy schemes.