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Automobiles, Tax Mischaracterizations, and the Multibillion Dollar Price Tag

Listed author(s):
  • James Alm


    (Department of Economics, Tulane University)

  • Jay A. Soled


    (Department of Accounting and Information Systems, Rutgers Business School)

The United States has more automobiles per capita than any other country in the industrial world, and taxpayers use those automobiles for business and nonbusiness purposes. The former classification affords favorable individual income tax treatment, while the latter does not. However, to secure favorable tax treatment, taxpayers often mischaracterize their nonbusiness automobile expenses as business in nature, and they are able to do so with almost complete impunity. Using tabulations of Internal Revenue Service data, we demonstrate that such mischaracterizations result in a significant annual cost in terms of forfeited tax revenue. In addition, using elementary economic theory, we illustrate how taxpayer mischaracterizations result in additional demand for gasoline, which likely raises overall gasoline prices for all consumers. On the basis of our findings, we contend that immediate reforms are needed, and we present several legislative options for Congress to consider. We also argue that the experience of automobile expenses carries larger lessons for other types of tax expenditures, lessons that have relevance to the ongoing discussions about comprehensive tax reform measures.

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File Function: First Version, February 2013
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Paper provided by Tulane University, Department of Economics in its series Working Papers with number 1306.

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Length: 28 pages
Date of creation: Feb 2013
Handle: RePEc:tul:wpaper:1306
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