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America’s Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S

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  • Feige, Edgar L.
  • Cebula, Richard

Abstract

Abstract This study empirically investigates the extent of non compliance with the tax code and the determinants of federal income tax evasion in the U.S. Employing the most recent data we find that 18-19% of total reportable income is not properly reported to the IRS, giving rise to a “tax gap” approaching $500 billion dollars. Three time periods are studied, 1960-2008, 1970-2008, and 1980-2008. It is found across study periods that income tax evasion is an increasing function of the average effective federal income tax rate, the unemployment rate, public dissatisfaction with government, and per capita real GDP (adopted as a measure of income), and a decreasing function of the Tax Reform Act of 1986 (during its first two years of being implemented). Modest evidence of a negative impact of IRS audit rates on tax evasion is also detected.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 29672.

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Date of creation: Jan 2011
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Handle: RePEc:pra:mprapa:29672

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Keywords: Underground economy; unreported economy; tax evasion; tax gap; non compliance; Federal income tax;

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References

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  1. Yaniv, Gideon, 1994. "Tax Evasion and the Income Tax Rate: A Theoretical Reexamination," Public Finance = Finances publiques, , vol. 49(1), pages 107-12.
  2. Phillip Cagan, 1958. "The Demand for Currency Relative to the Total Money Supply," Journal of Political Economy, University of Chicago Press, vol. 66, pages 303.
  3. Mukhtar Ali & H. Cecil & James Knoblett, 2001. "The effects of tax rates and enforcement policies on taxpayer compliance: A study of self-employed taxpayers," Atlantic Economic Journal, International Atlantic Economic Society, vol. 29(2), pages 186-202, June.
  4. Gary C. Sanger & C. F. Sirmans & Geoffrey K. Turnbull, 1990. "The Effects of Tax Reform on Real Estate: Some Empirical Results," Land Economics, University of Wisconsin Press, vol. 66(4), pages 409-424.
  5. Feige, Edgar L, 1994. "The Underground Economy and the Currency Enigma," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 119-36.
  6. Erard, Brian & Feinstein, Jonathan S, 1994. "The Role of Moral Sentiments and Audit Perceptions in Tax Compliance," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 70-89.
  7. Andreoni, J. & Erard, B. & Feinstein, J., 1996. "Tax Compliance," Working papers 9610r, Wisconsin Madison - Social Systems.
  8. Alm, James & Jackson, Betty & McKee, Michael, 1992. "Institutional Uncertainty and Taxpayer Compliance," American Economic Review, American Economic Association, vol. 82(4), pages 1018-26, September.
  9. Richard J. Cebula, 2001. "Impact of income-detection technology and other factors on aggregate income tax evasion:the case of the United States," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 54(219), pages 401-415.
  10. Caballe, Jordi & Panades, Judith, 1997. "Tax Evasion and Economic Growth," Public Finance = Finances publiques, , vol. 52(3-4), pages 318-40.
  11. Edgar L. Feige, 2005. "Overseas Holdings Of U.S.Currency And The Underground Economy," Macroeconomics 0501022, EconWPA.
  12. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Chapters, in: The Demand for Currency Relative to Total Money Supply, pages 1-37 National Bureau of Economic Research, Inc.
  13. Clotfelter, Charles T, 1983. "Tax Evasion and Tax Rates: An Analysis of Individual Returns," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 363-73, August.
  14. Thurman, Quint C, 1991. "Taxpayer Noncompliance and General Prevention: An Expansion of the Deterrence Model," Public Finance = Finances publiques, , vol. 46(2), pages 289-98.
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  16. Spicer, M W & Lundstedt, S B, 1976. "Understanding Tax Evasion," Public Finance = Finances publiques, , vol. 31(2), pages 295-305.
  17. Richard J. Cebula, 2004. "Income Tax Evasion Revisited: The Impact of Interest Rate Yields on Tax-Free Municipal Bonds," Southern Economic Journal, Southern Economic Association, vol. 71(2), pages 418-423, October.
  18. Attiat Ott & Sheila Vegari, 2003. "Tax reform: Chasing the elusive dream," Atlantic Economic Journal, International Atlantic Economic Society, vol. 31(3), pages 266-282, September.
  19. Feige, Edgar L., 2009. "New estimates of overseas U.S. currency holdings, the Underground economy and the "Tax Gap"," MPRA Paper 19564, University Library of Munich, Germany.
  20. Slemrod, Joel B, 1985. "An Empirical Test for Tax Evasion," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 232-38, May.
  21. Feige,Edgar L. (ed.), 1989. "The Underground Economies," Cambridge Books, Cambridge University Press, number 9780521262309.
  22. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Books, National Bureau of Economic Research, Inc, number caga58-1, October.
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Citations

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Cited by:
  1. Mandelman, Federico S., 2013. "Labor market polarization and international macroeconomic dynamics," Working Paper 2013-17, Federal Reserve Bank of Atlanta.
  2. Levaggi, Rosella & Menoncin, Francesco, 2013. "Optimal dynamic tax evasion," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2157-2167.
  3. Pickhardt, Michael & Sardà, Jordi, 2011. "Cash, hoarding and the underground economy," CAWM Discussion Papers 56, Center of Applied Economic Research Münster (CAWM), University of Münster.

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  1. Black market in Wikipedia English ne '')
  2. Taxation in the United States in Wikipedia English ne '')
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  4. Tax evasion in the United States in Wikipedia English ne '')
  5. 地下経済 in Wikipedia Japanese ne '')

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