The Effects of Introducing Withholding on Tax Compliance: Evidence from Pennsylvania’s Local Earned Income Tax

Sutirtha Bagchi

No 58, 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 Act 32 of the Pennsylvania state legislature which mandated the introduction of withholding for the local earned income tax (EIT) for all employees and the consolidation of a fragmented collection system to one collector per county effective January 1, 2012. I find that the act resulted in increased compliance with the EIT of about 14 percent, with the increased compliance driven entirely by an increase in revenues as opposed to changes to the tax base or rates. I confirm this result using a differences-in-differences analysis that contrasts tax compliance for school districts in Pennsylvania with those in Iowa – the only other state where a majority of school districts levy a local income tax. Falsification exercises examining compliance with the property tax confirm that Act 32 did not impact the property tax in either the event study or the differences-in-differences analysis.

Keywords: Earned income tax; Tax compliance; Withholding; Event Study (search for similar items in EconPapers)
JEL-codes: H26 H71 R51 (search for similar items in EconPapers)
Date: 2022-11
New Economics Papers: this item is included in nep-iue, nep-law, nep-pbe, nep-pub and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:vil:papers:58

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