The excess burden of tax evasion - An experimental detection-concealment contest  Ralph-C Bayer y and Matthias Sutter z September 17, 2008 Abstract Tax evasion may cause social welfare losses due to the incentives of taxpayers to invest in the concealment and of tax authorities to invest in the detection of tax evasion. Reducing the investment of both parties at the same time would then lead to a Pareto improvement. Given that concealment and detection costs are hardly measurable in reality, we show in a controlled laboratory experiment that the welfare losses from a concealment-detection contest depend positively on the prevailing tax rate, but not on the penalty which is imposed in case of detected tax evasion. Hence, policy makers who are concerned about socially ine¢cient concealment and enforcement costs should focus on tax rates rather than penalty rates. JEL-classication code: H26, K42, C91 Keywords: tax evasion, concealment, detection, tax rates, penalty rates, experiment  We would like to thank two anonymous referees for helpful comments. Financial support from the Center of Experimental Economics at the University of Innsbruck (sponsored by the Rai/eisen-Landesbank Tirol ) is gratefully acknowledged. y University of Adelaide, School of Economics, North Terrace, SA 5005, Australia, e-mail: ralph.bayer@adelaide.edu.au. z University of Innsbruck and University of Gothenburg. Corresponding address: University of Inns- bruck. Department of Public Finance. Universitaetsstrasse 15. A-6020 Innsbruck. Austria. e-mail: matthias.sutter@uibk.ac.at