Implications of Recent Federal Personal Income Tax Increases for Income Tax Evasion, Tax Revenues, and Budget Deficits

Richard Cebula (), Robert Boylan, Maggie Foley () and Douglass Isard

MPRA Paper from University Library of Munich, Germany

Abstract: In 2013, federal personal income tax increases were implemented in the U.S. under provisions of two federal statutes: the American Taxpayer Relief Act of 2012 and the Patient Protection and Affordable Care Act of 2010. Based on our analysis of data for the time period 1970-2008, we argue that the incentives to engage in federal personal income tax evasion have been increased as a direct consequence of the public tax-increase policies manifested in these two statutes. To demonstrate this conclusion in the present study, we first present evidence that strongly suggests that personal income tax evasion has been an increasing function of the maximum marginal federal personal income tax rate over the period 1970-2008, which constitutes the most current data currently available on aggregate personal income tax evasion. This evidence leads us then to conclude that the federal personal income tax increases implemented effectively in 2013 under provisions of the two aforementioned statutes will result in increased tax evasion behavior and hence lower tax collections. Among other things, then, this public-policy-induced increase in personal income tax evasion also implies that the federal budget deficits in coming years will be greater than projected by the CBO and various government agencies. We also find that, among other things, federal personal income tax evasion has been an increasing function of the unemployment rate. Thus, among other things, there is also evidence that continued high unemployment rates may increase tax evasion and hence the size of federal budget deficits.

Keywords: underground economy; tax evasion; income tax increases (search for similar items in EconPapers)
JEL-codes: H24 H26 H31 H62 (search for similar items in EconPapers)
Date: 2014-04-11
New Economics Papers: this item is included in nep-acc, nep-iue and nep-pbe
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Citations: View citations in EconPapers (1)

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Working Paper: Implication of Recent Federal Personal Income Tax Increases for Income Tax Evasion, Tax Revenues, and Budget Deficits (2014)
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