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

Sutirtha Bagchi and Libor Dusek

No 50, Villanova School of Business Department of Economics and Statistics Working Paper Series from Villanova School of Business Department of Economics and Statistics

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.

Keywords: Tax Easion; Third-Party Reporting; Withholding; Tax Base Changes; Difference-in-Differences (search for similar items in EconPapers)
JEL-codes: H11 H21 H26 H71 N42 (search for similar items in EconPapers)
Date: 2021-07
New Economics Papers: this item is included in nep-acc, nep-his, nep-iue, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:vil:papers:50

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