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Third-party Reporting and Tax Collections: Evidence from the Introduction of Withholding of the State Personal Income Tax

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Abstract

This paper examines the impact of introducing withholding of the personal income tax by state governments in the U.S. We exploit the staggered adoption of withholding by individual states over the period 1948–1987 to construct difference-in-differences style estimates. We obtain a robust finding: Introducing withholding led to an immediate and permanent increase in income tax revenues by about 22 percent, holding tax rates constant. The result is consistent with the crucial role of withholding and third-party reporting in improving tax compliance. We consider several alternative explanations such as changes to the tax base and increases in enforcement activity but these explanations lack support. There is some evidence that non-filing substantially decreased following the introduction of withholding.

Suggested Citation

  • Sutirtha Bagchi & Libor Dušek, 2021. "Third-party Reporting and Tax Collections: Evidence from the Introduction of Withholding of the State Personal Income Tax," Villanova School of Business Department of Economics and Statistics Working Paper Series 50, Villanova School of Business Department of Economics and Statistics.
    • Handle: RePEc:vil:papers:50
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    More about this item

    Keywords

    Tax Easion; Third-Party Reporting; Withholding; Tax Base Changes; Difference-in-Differences;
    All these keywords.

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • N42 - Economic History - - Government, War, Law, International Relations, and Regulation - - - U.S.; Canada: 1913-

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