Based on prospect theory's value function, we predict how reference points adapt to
influence individuals' tax evasion choices during and after experiencing temporary tax
changes. Results from a multi-round experiment indicate reactions to temporary changes
depend jointly on the direction of the change and expectations. Specifically, individuals
experiencing a tax increase evade more while the increase is in effect. More interestingly,
knowing, versus not knowing, a tax decrease is temporary prevents an increase in evasion …