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Where Has the Currency Gone? And Why? The Underground Economy and Personal Income Tax Evasion in the U.S., 1970-2008

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  • Cebula, Richard

Abstract

Unaccounted for currency in the U.S. is argued to reflect the presence of widespread income tax evasion. This empirical study seeks to identify determinants of the underground economy in the U.S. in the form of federal personal income tax evasion over the period 1970-2008. In this study, we use the most recent data available on personal income tax evasion, data that are derived from the General Currency Ratio Model and measured in the form of the ratio of unreported AGI (adjusted gross income) to reported AGI. Other studies of federal income tax evasion for the U.S. are dated and do not use data this current. It is found that personal income tax evasion was an increasing function of the maximum marginal federal personal income tax rate, the percentage of federal personal income tax returns characterized by itemized deductions, and unpopular military engagements, in this case, the War in Iraq, and a decreasing function of the Tax Reform Act of 1986 (during its first two years of being implemented), the ratio of the tax free interest rate yield on high grade municipals to the interest rate yield on ten year Treasury notes (as a measure of the incentive effect of a better return to tax avoidance, which is legal), and higher audit rates of filed federal income tax returns (as a measure of risk from tax evasion) by IRS personnel.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 55284.

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Date of creation: 12 Apr 2014
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Handle: RePEc:pra:mprapa:55284

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Keywords: underground economy; tax evasion; tax rates; audit rates;

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  1. Caballe, Jordi & Panades, Judith, 1997. "Tax Evasion and Economic Growth," Public Finance = Finances publiques, , vol. 52(3-4), pages 318-40.
  2. Spicer, Michael W. & Thomas, J. Everett, 1982. "Audit probabilities and the tax evasion decision: An experimental approach," Journal of Economic Psychology, Elsevier, vol. 2(3), pages 241-245, September.
  3. 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.
  4. 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.
  5. 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.
  6. Falkinger, Josef, 1988. "Tax Evasion and Equity: A Theoretical Analysis," Public Finance = Finances publiques, , vol. 43(3), pages 388-95.
  7. 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.
  8. 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.
  9. Musgrave, Richard A, 1987. "Short of Euphoria," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 59-71, Summer.
  10. Richard J Cebula & John P Cook & Tarek A Issa, 2007. "Economics, Wars and Scandals: Their Impacts on the US Public Approval Ratings of its President Over the Long Run," The IUP Journal of Applied Economics, IUP Publications, vol. 0(3), pages 31-39, May.
  11. Baldry, Jonathan C, 1987. "Income Tax Evasion and the Tax Schedule: Some Experimental Results," Public Finance = Finances publiques, , vol. 42(3), pages 357-83.
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