Marginal Tax Rates and Income Tax Noncompliance

• In Event: Tax Evasion and Enforcement: Measurement and Estimation

Abstract

We study how marginal tax rates affect the amount of income tax underreporting by individual income taxpayers in the U.S. This is an interesting and open question, as theoretical models suggest the effect could go either way (see Allingham and Sandmo (1972)), and previous empirical studies are generally dated and do not account for the endogeneity of marginal tax rates to reported income. Our study uses new method and more recent data to identify the causal effect of marginal tax rates on income reporting in the United States. Utilizing administrative tax audit data from the National Research Program that span 2006-2017, we estimate the responsiveness of noncompliance as measured by audit adjustments to marginal tax rates using three approaches; pooled cross-section regression, difference-in-differences estimation of the Kansas state tax reform, and examining differences in bunching at kink points pre- and post-audit. Across all three approaches, results consistently show that higher marginal tax rates lead to greater amounts of non-compliance, with elasticities ranging from XX to XX, with larger elasticities for taxpayers with Schedule C or E income and in response to larger tax rate changes.

Authors

• Jason DeBacker, University of South Carolina

• Alexander Yuskavage, Department of the Treasury

• Bradley T. Heim, University of Central Florida