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America’s unreported 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 noncompliance with the tax code and examines the determinants of federal income tax evasion in the U.S. Employing a refined version of Feige’s (1986; 1989) General Currency Ratio (GCR) model to estimate a time series of unreported income as our measure of tax evasion, we find that 18-23 % of total reportable income may not properly be reported to the IRS. This gives rise to a 2009 “tax gap” in the range of $390-$537 billion. As regards the determinants of tax noncompliance, we find that federal income tax evasion is an increasing function of the average effective federal income tax rate, the unemployment rate, the nominal interest rate, and per capita real GDP, and a decreasing function of the IRS audit rate. Despite important refinements of the traditional currency ratio approach for estimating the aggregate size and growth of unreported economies, we conclude that the sensitivity of the results to different benchmarks, imperfect data sources and alternative specifying assumptions precludes obtaining results of sufficient accuracy and reliability to serve as effective policy guides.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34781.

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Date of creation: Sep 2011
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Handle: RePEc:pra:mprapa:34781

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Related research

Keywords: Unreported economy; Underground economy; tax evasion; tax gap; noncompliance; income tax evasion; currency demand approach; currency ratio models;

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References

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  1. Feige, Edgar L. & Urban, Ivica, 2007. "Measuring Underground (Unobserved, Non-Observed, Unrecorded) Economies in Transition Countries: Can We Trust GDP?," MPRA Paper 7345, University Library of Munich, Germany.
  2. Edgar L. Feige, 1986. "A Re-Examination of the "Underground Economy" in the United States: A Comment on Tanzi," IMF Staff Papers, Palgrave Macmillan, vol. 33(4), pages 768-781, December.
  3. 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.
  4. Vito Tanzi, 1983. "The Underground Economy in the United States: Annual Estimates, 1930-80 (L'économie clandestine aux Etats-Unis: estimations annuelles, 1930-80) (La "economía subterránea" de Estados," IMF Staff Papers, Palgrave Macmillan, vol. 30(2), pages 283-305, June.
  5. Naomi E. Feldman & Joel Slemrod, 2007. "Estimating tax noncompliance with evidence from unaudited tax returns," Economic Journal, Royal Economic Society, vol. 117(518), pages 327-352, 03.
  6. Trevor Breusch, 2005. "Estimating the Underground Economy using MIMIC Models," Econometrics 0507003, EconWPA, revised 25 Jul 2005.
  7. Feige, Edgar L, 1994. "The Underground Economy and the Currency Enigma," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 119-36.
  8. Edgar L. Feige, 2003. "Defining And Estimating Underground And Informal Economies: The New Institional Economics Approach," Development and Comp Systems 0312003, EconWPA.
  9. Andreoni, J. & Erard, B. & Feinstein, J., 1996. "Tax Compliance," Working papers 9610r, Wisconsin Madison - Social Systems.
  10. Falkinger, Josef, 1988. "Tax Evasion and Equity: A Theoretical Analysis," Public Finance = Finances publiques, , vol. 43(3), pages 388-95.
  11. Trevor Breusch, 2005. "Australia's Cash Economy: Are the Estimates Credible?," The Economic Record, The Economic Society of Australia, vol. 81(255), pages 394-403, December.
  12. Feige, Edgar L., 2011. "New estimates of U.S. currency abroad, the domestic money supply and the unreported Economy," MPRA Paper 34778, University Library of Munich, Germany.
  13. Trevor Breusch, 2006. "Size, Causes and Consequences of the Underground Economy: An International Perspective Edited by Christopher Bajada and Friedrich Schneider," The Economic Record, The Economic Society of Australia, vol. 82(259), pages 492-494, December.
  14. Edgar L. Feige, 2004. "How Big IS the Irregular Economy?," Macroeconomics 0404005, EconWPA.
  15. Pestieau, Pierre & Possen, Uri & Slutsky, Steve, 1994. "Optimal Differential Taxes and Penalties," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 15-27.
  16. Sandmo, Agnar, 2005. "The Theory of Tax Evasion: A Retrospective View," National Tax Journal, National Tax Association, vol. 58(4), pages 643-63, December.
  17. 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.
  18. Frank A. Cowell, 1990. "Cheating the Government: The Economics of Evasion," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262532484, December.
  19. Edgar L. Feige, 2005. "Overseas Holdings Of U.S.Currency And The Underground Economy," Macroeconomics 0501022, EconWPA.
  20. Joel Slemrod, 2007. "Cheating Ourselves: The Economics of Tax Evasion," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 25-48, Winter.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. How much tax evasion is there in the US?
    by Economic Logician in Economic Logic on 2011-12-05 15:22:00
  2. The New Yorker Discovers That Americans Are Hiding Money from Uncle Sam
    by J.D. Tuccille in Hit & Run blog on 2013-04-22 21:42:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. 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.
  2. Feige, Edgar L., 2012. "The myth of the “cashless society”: How much of America’s currency is overseas?," MPRA Paper 42169, University Library of Munich, Germany.
  3. Feige, Edgar L., 2011. "New estimates of U.S. currency abroad, the domestic money supply and the unreported Economy," MPRA Paper 34778, University Library of Munich, Germany.

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  1. Economic Logic blog

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