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

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

MPRA Paper from University Library of Munich, Germany

Abstract: In this study, we present evidence which 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 to conclude that the federal personal income tax increases implemented effectively in 2013 under provisions of American Taxpayer Relief Act of 2012 and the Patient Protection and Affordable Care Act of 2010 will result in increased tax avoidance behavior. Among other things, this public-policy-induced increase in personal income tax evasion 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 tax avoidance activity is an increasing function of the unemployment rate, the interest rate yield on three year Treasury Notes, and per capita real GDP (adopted as a measure of per capita real income), and a decreasing function of the Tax Reform Act of 1986 (during its first two years of being implemented), the IRS audit rate, and the ratio of the tax free interest rate yield on high grade municipals to the interest rate yield on ten year Treasury Notes. Thus, there is also evidence that persistently high unemployment rates may increase tax evasion and the size of federal budget deficits, although increasing the audit rate by IRS personnel may raise tax compliance to some extent.

Keywords: underground economy; tax evasion; tax rate increases; tax revenues; budget deficit (search for similar items in EconPapers)
JEL-codes: H24 H26 M42 (search for similar items in EconPapers)
Date: 2014-07-12
New Economics Papers: this item is included in nep-acc, nep-iue and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in William & Mary Policy Review 1.6(2014): pp. 93-114

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Related works:
Working Paper: Implications of Recent Federal Personal Income Tax Increases for Income Tax Evasion, Tax Revenues, and Budget Deficits (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:68405

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