How Do Tax Evasion Opportunities Affect Prices?

We use two experiments to examine how tax evasion opportunities affect market prices. In both experiments, buyers and sellers trade a fictitious good subject to a per-unit seller tax. We show in the first experiment that equilibrium prices fall when evasion is possible, reflecting a lower effective tax burden. We hold the effective tax burden constant in the second experiment and find that markets with evasion opportunities tend to trade at higher prices than markets without evasion opportunities. The effect size exceeds half the effective tax rate and one standard deviation of mean prices, highlighting meaningful price and incidence implications.