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New and Current Evidence on Determinants of Aggregate Federal Personal Income Tax Evasion in the United States
Abstract
Using the most current data available, this study seeks to identify any new as well as traditional determinants of personal income tax evasion. A variety of empirical estimates find that income tax rates, the IRS audit rate and IRS penalty interest rates, and the unemployment rate all influence tax evasion. In addition, rarely inves-tigated variables including the tax-free interest rate, the public's job approval rating of the president, and the public's dissatisfaction with government, along with previously unstudied variables, namely, the real interest rate yield on Moody's Baa-rated long-term corporate bonds and the real interest rate yield on three-year Treasury notes, also affect income tax evasion.
... Unreported activities are defined as " those economic activities that circumvent or evade the institutionally established fiscal rules as codified in the tax code " (p. 7). In fact, much economic activity goes unreported with the aim of evading income and other taxes (Cebula, 2013 ). Not surprisingly, it is particularly difficult to enforce tax compliance by sole proprietorships , and as a result this type of economic activity, which includes a vast majority of child care providers, is more likely that other activities to go unreported (Alm and Yunus, 2009 ). ...
The informal childcare sector provides a significant proportion of childcare in the U.S. However, because informal sectors are not captured in our national income accounting system, the value to our economy is largely unknown. This study examines the siz e of the informal childcare sector in the state of Kansas. Using IMPLAN data we also calculate implicit multipliers for the sector in order to estimate the full economic effects of informal childcare on the economy of Kansas and its regions. We find that the informal childcare sector creates large economic effects compared to the formal childcare sector. More specifically, the study estimates that informal childcare created about 128,494 direct jobs within the sector, another 6,842 jobs in other sectors, and $971.5 million in total value added in Kansas in 2005. We found that families in non-metro areas are more likely to use informal childcare than those in metro areas. As a result, even though the non-metro multipliers are smaller than those of metro areas, the informal childcare sector generates larger economic effects in non-metro areas than metro areas in general.
In this paper we argue that there is a social norm of tax compliance that affects individual reporting decisions and that can be affected by government institutions. We use experimental methods tu test these notions. Our experimental design captures the essential features of the fiscal and voting systems present in many countries: individuals receive income, they pay taxes on income voluntarily reported, taxes are used to provide a public good, individuals face some chance that unreported taxes will be detected and penalized, and, importantly, individuals vote via majority rule on different aspects of the fiscal system. Our experimental results are consistent with a central role for social norms in tax compliance behavior. In all sessions. individual compliance behavior after a vote is announced is decidedly different from the pl pre-vote behavior under the identical fiscal regime. Of particular interest. when the group rejects greater enforcement, compliance always falls. often collapsing virtually to zero: we argue that this latter result demonstrates that thr group decision destroys any pre-vote social norm of tax compliance, and post-vote compliance disappears. However, our results also suggest that the social norm of tax compliance can be affected by group communication. In several sessions, subjects an allowed to communicate before a vote is taken. After this 'cheap talk'. subjects select a greater level of enforcement, and the post-vote level of reporting with the cheap talk now approaches full compliance: that is, it is as if the cheap talk changes the social norm of tax compliance so that paying taxes is now the accepted mode of behavior. We also examine individual voting behavior.
This paper examines the twin issues of spatiality and persistence in the individual income tax evasion decision. The issue of persistence arises through accumulated learning over time; spati-ality arises for several reasons, including the exchange of informa-tion between taxpayers, the social norm of tax compliance, and the difficulties faced by individuals with dynamic stochastic decision problems like tax evasion. The paper uses state-level, time-series, cross-section data for the years 1979 to 1997 to estimate the factors that affect per return evasion of the individual income tax. The esti-mation methods incorporate both spatial dependence and dynamic considerations; they also consider the potential endogeneity of the audit rate. The empirical results provide strong and robust support for both spatiality and persistence in tax evasion. The results also show a large deterrent effect from higher audit rates.
Uses data on publicly traded real estate firms to examine the effects of two major tax reforms. Specifically, we analyze the effects of the 1976 and 1986 Tax Reform Acts (TRAs) on the risks and returns of real estate investment trusts (REITs) and other real estate firms, using intervention analysis. In contrast with the existing literature, we use market data to evaluate the empirical effects of the 1976 and 1986 law changes. In the next section of the paper we discuss the historical background of the 1976 and 1986 Tax Reform Acts, emphasizing provisions influencing REITs and real estate in general. We also outline the anticipated effects of these provisions on the value of real estate assets relative to other assets. We argue that the net impact of the 1976 act on REITs and other real estate corporations remains an empirical question, in part because the rules limiting loss offsets tend to increase the value of real estate firms while the construction period capitalization rules tend to decrease the value of real estate firms relative to other entities. We describe the data and methodology in Section III and present the empirical results in Section IV. Section V contains our conclusions. -from Authors
In this paper we analyze how the tax compliance policy affects the rate of economic growth. We consider a model of overlapping generations in which the paths of all the macroeconomic variables are endogenously determined and we perform the comparative statics analysis of changes in both the probability of inspection and the penalty fee imposed on tax evaders. We also show the non- optimality from the growth viewpoint of an inspection policy inducing truthful revelation of income for exogenously given levels of both the penalty and the tax rates. Finally, we show that "hanging evaders with probability zero" is the most growth enhancing policy among all the inspection policies inducing honest behavior by the taxpayers.
The size, growth and causes of the US “underground economy” are examined in light of new estimates of foreign holdings of US currency. World dollarization partially resolves the “currency enigma” which refers to the anomaly that roughly 80% of the US currency supply is “missing” and an estimated ten trillion dollars of cash payments can not be accounted for. US currency that is used overseas suggests that there is a world wide unrecorded economy that could rival the size of the US economy. Large and variable overseas holdings of US currency imply that monetary aggregates must be redefined to include only domestically held currency. The paper defines and estimates the size of the ‘domestic money supply”. Reference: Proceedings of the 49th Congress of the International Institute of Public Finance, Berlin 1993, Supplement to Public Finance Vol. 49 (1994) pp.119-136.
This paper attempts to assess whether the Tax Reform Act of 1986 simplified tax matters significantly, or at all. I conclude that, despite a few scattered signs that tax-related financial planning has declined, the compliance cost of the income tax system is probably higher now than it was in the early 1980s. This suggests that the Tax Reform Act achieved little, if any, simplification in the tax system, although it remains possible that the Act dampened what would have been an even greater increase in compliance cost.
In the past six years there has been a revolutionary development in economics. Six years ago, the subterranean economy — that broad area of productive economic activity which wholly escapes the ministrations of the tax collector and largely that of the statistician — simply did not exist, in the official view, in the perception of the public and among economists.
There exists an important puzzle in the income tax evasion literature, that higher tax rates unambiguously encourage tax compliance (Yitzhaki?s (1974) result). In this paper I show that by simply relaxing the assumption that higher tax rates necessarily translate into higher penalty payments at the initial optimum when caught, it is possible to generate rigorously an important extra disincentive to compliance, which is absent from the previous works. It can also be shown that Yitzhaki's (1974) result is a special case of the present formulation.
A report of an experiment which replicates the income tax assessment procedure and is designed to test two predictions of tax evasion theory: that every individual will attempt some evasion if the expected gains are positive, and that a change in the marginal tax rate (average rate constant) will not influence the amount of evasion attempted. Both predictions are strongly rejected by the results, though a positive influence of true after-tax income on evasion, which is consistent with the basic model, is confirmed.
This article presents yearly estimates for the underground economy in the United States for the period 1930-80. The method used for calculation is one developed a few years ago by the author, and it has been used in many other countries. The main conclusions can be summarized as follows: (1) in 1980 the underground economy, expressed as a percentage of gross national product (GNP), was somewhere between 4.5 percent and 6.1 percent; (2) the only other period in which it might have been higher than that was during World War II; (3) it has been increasing since the mid-1960s; and (4) over the period 1965-80, it has grown by more than 2 percentage points of GNP (by almost 50 percent). The recent trend is disturbing, as it seems to have accelerated in recent years, especially since the mid-1970s. This trend was probably influenced by the substantial increase in marginal tax rates over the period 1975-80, caused by inflation and the absence of significant tax cuts. It is not possible at this point to speculate on whether the tax cuts enacted in 1981 have reversed the trend. The results obtained in this paper should not be taken as precise measures of the underground economy; they are, at best, broad indications of trends and of orders of magnitude because they are sensitive to the assumptions made as well as to data revisions. However, it is comforting to realize that for 1974 and 1976 they are of the same order of magnitude as direct estimates by Simon and Witte (1980) and by the Internal Revenue Service (1979). A word on what has been measured is necessary. The estimates attempt to measure the incomes that were associated with the excessive use of cash and that presumably were not reported to the tax authorities. Whether these incomes were or were not measured by the national accounts authorities cannot be determined. Presumably, part of these incomes not only evaded the tax net but also may have escaped the attention of the national accounts authorities--but, how large this part was cannot be assessed with the information at hand. Should this part be large, it would have serious implications for the conduct of economic policy that is based largely on changes in economic activity as reflected by the national accounts. /// Le présent article fournit des estimations annuelles relatives à l'économie clandestine aux Etats-Unis pour la période 1930-80. La méthode utilisée pour effectuer les calculs a été mise au point par l'auteur il y a quelques années et a été appliquée dans de nombreux autres pays. Les conclusions principales peuvent être résumées comme suit: 1) en 1980, l'économie clandestine, exprimée en pourcentage du produit national brut (PNB), s'est située entre 4,5% et 6,1%; 2) la seule période pendant laquelle elle a peut-être représenté un pourcentage plus élevé est celle de la deuxième guerre mondiale; 3) la part de l'économie clandestine a augmenté depuis le milieu des années 60; et 4) au cours de la période 1965-80, elle a augmenté, en proportion du PNB, de plus de deux points de pourcentage (soit de près de 50%). La tendance enregistrée récemment est préoccupante, étant donné que l'économie clandestine semble se développer à un rythme croissant, surtout depuis le milieu des années 70. Cette tendance a probablement été influencée par l'augmentation considérable des taux marginaux d'imposition au cours de la période 1975-80, augmentation due à l'inflation et à l'absence de réduction sensible des impôts. Il n'est pas possible à ce stade de déterminer si les réductions d'impôts adoptées en 1981 ont renversé ou non la tendance. Les résultats figurant dans la présente étude ne doivent pas être considérés comme des mesures précises de l'économie clandestine; ils ne donnent, au mieux, que des indications générales des tendances et des ordres de grandeur parce qu'ils sont sensibles aux hypothèses retenues ainsi qu aux révisions des données. Toutefois, il est rassurant de constater que, pour 1974 et 1976, les chiffres sont du même ordre de grandeur que les estimations directes effectuées par Simon et Witte en 1980, et par l'administration fiscale des Etats-Unis (Internal Revenue Service) en 1979. Il convient de préciser brièvement les éléments qui ont été mesurés. Les estimations cherchent à évaluer les revenus liés à l'utilisation excessive des règlements en espèces et qui n'ont probablement pas été déclarés à l'administration des impôts. Il n'est pas possible de déterminer si ces revenus ont ou non été évalués par les services responsables de la comptabilité nationale. Selon toute vraisemblance, une partie de ces revenus a non seulement échappé à l'impôt mais, en outre, a échappé à l'attention des services de la comptabilité nationale; toutefois, il n'est pas possible d'évaluer, sur la base des renseignements disponibles, l'ampleur de cette partie des revenus. Si elle est effectivement importante, elle pourrait avoir des effets graves sur la conduite de la politique économique qui se fonde essentiellement sur les variations de l'activité économique telles qu'elles apparaissent dans la comptabilité nationale. /// En este estudio se presentan estimaciones anuales de la "economÃa subterránea" de Estados Unidos durante el perÃodo 1930-80. El método empleado para el cálculo es el ideado hace unos años por el autor y se ha aplicado ya en muchos otros paÃses. Las conclusiones principales serÃan las siguientes: 1) en 1980 la "economÃa subterránea", medida en porcentaje del producto nacional bruto (PNB), se situó entre 4,5 por ciento y 6,1 por ciento; 2) el otro perÃodo en que podrÃa haber sido superior fue el correspondiente a la segunda guerra mundial; 3) "la economÃa subterránea" ha venido creciendo desde mediados del decenio de los sesenta, y 4) durante el perÃodo 1965-80 ha aumentado más de 2 puntos porcentuales del PNB (casi 50 por ciento). Esta última tendencia es alarmante ya que parece haberse acelerado en los últimos años, especialmente a partir de mediados del decenio de los setenta. Probablemente esta propensión se haya visto influida por el gran aumento de las tasas impositivas marginales durante el perÃodo 1975-80 causado por la inflación y la falta de reducciones tributarias significativas. De momento no se puede saber si las reducciones tributarias de 1981 habrán invertido la tendencia. Los resultados obtenidos en este artÃculo no deben entenderse como medidas precisas de la "economÃa subterránea"; en el mejor de los casos son una indicación general de tendencias y de órdenes de magnitud que a su vez están influenciados por los supuestos utilizados y posibles revisiones de datos. Sin embargo, resulta alentador comprobar que para 1974 y 1976 son del mismo orden de magnitud que las estimaciones directas de Simon y Witte (1980) y de la Dirección de Impuestos de Estados Unidos (1979). Conviene puntualizar qué ha sido objeto de medición en este estudio. Las estimaciones tratan de cuantificar ingresos asociados al uso excesivo de dinero en efectivo y que puede suponerse no fueron declarados a las autoridades tributarias. No puede determinarse si estos ingresos han sido o no contabilizados por las autoridades encargadas de las cuentas nacionales. Cabe suponer que parte de estos ingresos no sólo evadieron ilegalmente la red tributaria sino que además escaparon de la atención de las autoridades a cargo de las cuentas nacionales. Sin embargo, con la información disponible, no es posible saber de qué porcentaje se trata. Si este porcentaje de ingresos es importante, tendrÃa serias consecuencias sobre la aplicación de la polÃtica económica, ya que ésta se basa en gran medida en las variaciones de la actividad económica tal como se reflejan en las cuentas nacionales.
This paper analyzes the behavior of an expected-utility maximizing tax evader who is aware of the fact that he gets some benefit in exchange for the taxes. Within this framework, the equity argument that the proportion by which a tax payer evades taxes decreases if the share in public expenditures that is for his benefit increases, cannot be confirmed unambiguously. There is, therefore, some theoretical support for the supposition that the equity argument is an ex post rationalization of otherwise motivated tax evasion.
This paper presents an econometric analysis of taxpayer compliance, exploring its relationship with audit rates, penalties
if detected, tax rate schedule, income level, and sources of self-employment income. Using data drawn from theAnnual Report of the Commissioner of Internal Revenue Service [IRS, various] and theData Book [IRS, various] for 1980 to 1995, the audit rate and penalty rate are both effective deterrents to noncompliance. The effectiveness
of these two policy instruments depends upon the individual's level of income. It seems the higher the income level, the more
effective these instruments are. In general, compliance increases with the level of income but at a decreasing rate. It is
also found that individuals tend to comply less as the marginal tax rate rises. Again, such tendency is more pronounced for
high-income taxpayers than for low-income taxpayers.
The debate as to whether political democracy, the political and civil liberties that citizens enjoy, contribute to economic growth in developing countries continues to be evasive. Several studes in the past 2 decades have brought some empirical evidence to bear on the democracy-growth link. However, these studies have been rather disparate in terms of i) the measurement and specification of the democracy variable itself, ii) the specific empirical model and the statistical procedures used, and iii) the time period and the countries analyzed. Given this, it is perhaps not surprising that, when viewed collectively, this evidence has generally yielded inconsistent results with regard to whether democratic political regimes promote or retard economic growth. We recognize that despite the weaknesses and inconsistent results, the previous studies did initiate an important inquiry into the growth-democracy connection and thereby provided a foundation for further exploration and refinements. In this study, we build on this literature by addressing the major issues raised above in a more comprehensive and systematic manner than has been attempted in the past. Specifically, our objectives are threefold: to 1) evaluate the growth-democracy relationship under a varied set of conditioning factors that have been identified in the literature as important determinants of growth; 2) bring empirical evidence to bear on the question of whether political democracy contributes to economic growth after accounting for economic freedom; and 3) investigate the direction of the causality between democracy and economic performance.
This article presents an econometric analysis of income tax evasion and its detection based on individual-level data drawn from the Internal Revenue Service 1982 and 1985 Taxpayer Compliance Measurement Programs. I specify a model consisting of two equations: the first measures the extent of evasion; the second, the fraction of evasion detected. The empirical analysis explores the effects of income, the marginal tax rate, and various socioeconomic characteristics on filer evasion behavior, and it assesses the variability in detection rates among IRS examiners. Finally, I use the empirical estimates to construct new estimates of the income tax gap; the new estimates are very close to the previous IRS estimates.
The paper provides a bird's-eye view of the long and arduous task of reforming the federal individual income tax. As a starting point for reviewing the major reforms, the authors evaluate Secretary Simon's criteria that underlie his contention that the “tax system was badly in need of a thorough overhaul.” Principles that should guide tax reforms are spelled out. Conflicts that arise with the application of these principles are highlighted. An examination of reform efforts in light of the principles and criteria set in the Treasury Department's Blue Prints for Tax Reform forms the basis for evaluating reforms enacted over the period 1978–2001. The review suggests that we are partway towards achieving the tax man's dream of equity, efficiency, and simplicity.
“The task of comprehensive reform is monumental in its dimension and far reaching in itspotential impact on our economic well-being.”
[William E. Simon, 1977, p. 11]
How extensive is corporate income tax noncompliance and how responsive is it to policy tools such as penalties, audits, and tax rates? This paper analyzes aggregate time series data on corporate compliance in an attempt to answer these questions. The results show audits to be an effective deterrent to noncompliance but cast doubt on the presumption that higher penalities or lower tax rates lead to improved compliance.
This paper argues that there is a social norm of tax compliance that affects individual reporting decisions and that can be affected by voting on different aspects of the fiscal system. Experimental results are consistent with a central role for social norms. Individual compliance after a vote is decidedly different from prevote compliance under the identical fiscal regime, in particular, compliance always falls dramatically after the group signals its rejection of the social norm by voting against greater enforcement. However, the results also suggest that social norms can be affected by group communication; in particular, postvote reporting with communication approaches full compliance. Copyright 1999 by WWZ and Helbing & Lichtenhahn Verlag AG
The literature on economic freedom and growth has utilized summary measures of freedom to determine its general significance for economic growth. We believe the summary measures lead to misspecification problems. We utilize Heston-Summers growth data to determine which of the disaggregated categories of economic freedom lead to growth and find that only a few of the indexes significantly affect growth. These growth regressions generate new weights for aggregating the indexes into an overall summary measure. This new measure can be interpreted as deriving a relative ranking of nations that have a relatively higher presence of growth promoting economic freedoms and more restrictions on those economic freedoms that inhibit growth. Copyright 2000 by WWZ and Helbing & Lichtenhahn Verlag AG
This paper uses both single-equation and multi-equation systems to examine whether fiscal policy ‘crowds out’ private investment. It is found that, for both the United States and Canada, this is in fact the case. In addition, it is shown that this crowding out leads to long term inflation.
In dieser Arbeit werden sowohl Ein- als auch Mehrgleichungssysteme verwendet, urn zu prüfen, ob durch die Fiskalpolitik private Investitionen verdrängt werden. Fur die Vereinigten Staaten and Kanada wird dieser Fall tatsächlich nachgewiesen. Zudem wird gezeigt, class dieses crowding out zu langfristiger Inflation führt.
Dares cet article, l'auteur utilise à la fois des systèmes à une et plusieurs équations pour étudier dans quelle mesure la politique ‘étouffe’ l'investissement privé. II démontre que c'est en effet le cas pour les Etats-Unis et le Canada. II montre également que cet ‘étouffement’ conduit à une inflation à long terme.
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