Using a natural experiment in the taxicab industry to analyze the effects of third-party income reporting

Bibek Adhikari, James Alm (jalm@tulane.edu), Brett Collins, Michael Sebastiani and Eleanor Wilking
Additional contact information
Brett Collins: Internal Revenue Service
Michael Sebastiani: Internal Revenue Service
Eleanor Wilking: Cornell School of Law

No 2117, Working Papers from Tulane University, Department of Economics

Abstract: This paper uses confidential tax returns data from sole proprietor businesses to estimate behavioral responses to the introduction of Form 1099-K, a third-party income reporting law that requires credit and debit card companies to report to the Internal Revenue Service gross of payment transactions that businesses receive through their payment systems. We estimate the causal impact of Form 1099-K on business reporting by exploiting a natural experiment in which some cities in the U.S. passed ordinances requiring taxicabs to install credit card readers in their vehicles, while other cities did not pass such ordinances, creating plausibly exogenous variation in the share of receipts reported on Form 1099-K. We find that taxpayers respond to third-party information reporting in offsetting ways. In particular, we find that businesses from cities with mandatory credit card in taxicab ordinances reported more receipts after the introduction of Form 1099-K compared to similar businesses from cities without mandatory credit card in taxicab ordinances, but they also reported an increase in expenses of similar magnitude. On net, third-party information reporting led to small and statistically insignificant changes in taxable income, profit, and tax liability. These results are robust to a variety of alternative specifications and placebo tests.

Keywords: Income reporting; Tax enforcement; Tax compliance; Taxi industry; Sole proprietors (search for similar items in EconPapers)
JEL-codes: H25 H26 H32 (search for similar items in EconPapers)
Date: 2021-12
New Economics Papers: this item is included in nep-acc, nep-iue, nep-law, nep-pay and nep-pbe
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http://repec.tulane.edu/RePEc/pdf/tul2117.pdf First Version, December 2021 (application/pdf)

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Journal Article: Using a natural experiment in the taxicab industry to analyze the effects of third-party income reporting (2022)
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