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An Empirical Analysis of the Impact of Government Tax and Auditing Policies on the Size of the Underground Economy: The Case of the United States, 1973-94

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  • Cebula, Richard

Abstract

This study empirically examines the impact of federal income tax rates, IRS penalties on unpaid tax liabilities, and audit rates by the Internal Revenue Service on the size of the underground economy in the United States. Recent data generated by Edgar Feige are used to measure the size of the underground econ­omy. Based on ordinary least squares estimates, it is found that the maximum marginal personal income tax rate raises the size of the underground economy. In addition, the size of the underground economy is found to be a decreasing function of both the percentage of tax returns audited and the penalties imposed by the IRS on unpaid taxes.

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File URL: http://mpra.ub.uni-muenchen.de/49810/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 49810.

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Date of creation: 18 Jan 1996
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Publication status: Published in The American Journal of Economics and Sociology 2.56(1997): pp. 173-186
Handle: RePEc:pra:mprapa:49810

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Keywords: tax evasion; tax rates; IRS audit rates; IRS penalties;

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References

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  1. Baldry, Jonathan C, 1987. "Income Tax Evasion and the Tax Schedule: Some Experimental Results," Public Finance = Finances publiques, , , vol. 42(3), pages 357-83.
  2. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, Elsevier, vol. 1(3-4), pages 323-338, November.
  3. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, Econometric Society, vol. 48(4), pages 817-38, May.
  4. 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.
  5. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Chapters, National Bureau of Economic Research, Inc, in: The Demand for Currency Relative to Total Money Supply, pages 1-37 National Bureau of Economic Research, Inc.
  6. Klepper, Steven & Nagin, Daniel & Spurr, Stephen, 1991. "Tax Rates, Tax Compliance, and the Reporting of Long-Term Capital Gains," Public Finance = Finances publiques, , , vol. 46(2), pages 236-51.
  7. Spicer, Michael W. & Thomas, J. Everett, 1982. "Audit probabilities and the tax evasion decision: An experimental approach," Journal of Economic Psychology, Elsevier, Elsevier, vol. 2(3), pages 241-245, September.
  8. 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.
  9. Phillip Cagan, 1958. "The Demand for Currency Relative to the Total Money Supply," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 66, pages 303.
  10. Spicer, M W & Lundstedt, S B, 1976. "Understanding Tax Evasion," Public Finance = Finances publiques, , , vol. 31(2), pages 295-305.
  11. 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.
  12. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number caga58-1.
  13. Pestieau, Pierre & Possen, Uri & Slutsky, Steve, 1994. "Optimal Differential Taxes and Penalties," Public Finance = Finances publiques, , , vol. 49(Supplemen), pages 15-27.
  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.
  15. de Juan, Ana & Lasheras, Miguel A & Mayo, Rafaela, 1994. "Voluntary Tax Compliant Behavior of Spanish Income Tax Payers," Public Finance = Finances publiques, , , vol. 49(Supplemen), pages 90-105.
  16. Alm, James & Jackson, Betty & McKee, Michael, 1992. "Institutional Uncertainty and Taxpayer Compliance," American Economic Review, American Economic Association, American Economic Association, vol. 82(4), pages 1018-26, September.
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