IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/29672.html
   My bibliography  Save this paper

America’s Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S

Author

Listed:
  • Feige, Edgar L.
  • Cebula, Richard

Abstract

This study empirically investigates the extent of non compliance with the tax code and the determinants of federal income tax evasion in the U.S. Employing the most recent data we find that 18-19% of total reportable income is not properly reported to the IRS, giving rise to a “tax gap” approaching $500 billion dollars. Three time periods are studied, 1960-2008, 1970-2008, and 1980-2008. It is found across study periods that income tax evasion is an increasing function of the average effective federal income tax rate, the unemployment rate, public dissatisfaction with government, and per capita real GDP (adopted as a measure of income), and a decreasing function of the Tax Reform Act of 1986 (during its first two years of being implemented). Modest evidence of a negative impact of IRS audit rates on tax evasion is also detected.

Suggested Citation

  • Feige, Edgar L. & Cebula, Richard, 2011. "America’s Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S," MPRA Paper 29672, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:29672
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/29672/1/MPRA_paper_29672.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Gary C. Sanger & C. F. Sirmans & Geoffrey K. Turnbull, 1990. "The Effects of Tax Reform on Real Estate: Some Empirical Results," Land Economics, University of Wisconsin Press, vol. 66(4), pages 409-424.
    2. Richard J. Cebula, 2001. "Impact of income-detection technology and other factors on aggregate income tax evasion:the case of the United States," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 54(219), pages 401-415.
    3. Phillip Cagan, 1958. "The Demand for Currency Relative to the Total Money Supply," Journal of Political Economy, University of Chicago Press, vol. 66, pages 303-303.
    4. Edgar L. Feige, 2005. "Overseas Holdings Of U.S.Currency And The Underground Economy," Macroeconomics 0501022, University Library of Munich, Germany.
    5. Feige,Edgar L. (ed.), 1989. "The Underground Economies," Cambridge Books, Cambridge University Press, number 9780521262309.
    6. Alm, James & Jackson, Betty & McKee, Michael, 1992. "Institutional Uncertainty and Taxpayer Compliance," American Economic Review, American Economic Association, vol. 82(4), pages 1018-1026, September.
    7. Falkinger, Josef, 1988. "Tax Evasion and Equity: A Theoretical Analysis," Public Finance = Finances publiques, , vol. 43(3), pages 388-395.
    8. Richard J. Cebula, 2004. "Income Tax Evasion Revisited: The Impact of Interest Rate Yields on Tax-Free Municipal Bonds," Southern Economic Journal, John Wiley & Sons, vol. 71(2), pages 418-423, October.
    9. Feige, Edgar L., 1997. "Revised estimates of the Underground Economy: Implications of US Currency held abroad," MPRA Paper 13805, University Library of Munich, Germany.
    10. Slemrod, Joel B, 1985. "An Empirical Test for Tax Evasion," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 232-238, May.
    11. James R. Barth, 1991. "The Great Savings and Loan Debacle," Books, American Enterprise Institute, number 918256, September.
    12. Yaniv, Gideon, 1994. "Tax Evasion and the Income Tax Rate: A Theoretical Reexamination," Public Finance = Finances publiques, , vol. 49(1), pages 107-112.
    13. Clotfelter, Charles T, 1983. "Tax Evasion and Tax Rates: An Analysis of Individual Returns," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 363-373, August.
    14. Thurman, Quint C, 1991. "Taxpayer Noncompliance and General Prevention: An Expansion of the Deterrence Model," Public Finance = Finances publiques, , vol. 46(2), pages 289-298.
    15. Erard, Brian & Feinstein, Jonathan S, 1994. "The Role of Moral Sentiments and Audit Perceptions in Tax Compliance," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 70-89.
    16. Attiat Ott & Sheila Vegari, 2003. "Tax reform: Chasing the elusive dream," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 31(3), pages 266-282, September.
    17. Pestieau, Pierre & Possen, Uri & Slutsky, Steve, 1994. "Optimal Differential Taxes and Penalties," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 15-27.
    18. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June.
    19. Mukhtar Ali & H. Cecil & James Knoblett, 2001. "The effects of tax rates and enforcement policies on taxpayer compliance: A study of self-employed taxpayers," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 29(2), pages 186-202, June.
    20. Brian Erard & Jonathan Feinstein, 1994. "The Role of Moral Sentiments and Audit Perceptions in Tax Compliance," Carleton Industrial Organization Research Unit (CIORU) 94-03, Carleton University, Department of Economics.
    21. Feige, Edgar L, 1994. "The Underground Economy and the Currency Enigma," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 119-136.
    22. Baldry, Jonathan C, 1987. "Income Tax Evasion and the Tax Schedule: Some Experimental Results," Public Finance = Finances publiques, , vol. 42(3), pages 357-383.
    23. Spicer, M W & Lundstedt, S B, 1976. "Understanding Tax Evasion," Public Finance = Finances publiques, , vol. 31(2), pages 295-305.
    24. Susan Pozo (ed.), 1996. "Exploring the Underground Economy," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number eue, August.
    25. Caballe, Jordi & Panades, Judith, 1997. "Tax Evasion and Economic Growth," Public Finance = Finances publiques, , vol. 52(3-4), pages 318-340.
    26. Feige, Edgar L., 2009. "New estimates of overseas U.S. currency holdings, the Underground economy and the "Tax Gap"," MPRA Paper 19564, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Farid Ameur & Mohamed Tkiouat, 2016. "A Contribution of Expected Utility Theory in Taxpayers' Behavior Modeling," International Journal of Economics and Financial Issues, Econjournals, vol. 6(3), pages 1217-1224.
    2. Florin Bostina, 2017. "Impact Of Tax Evasion On The Economic Growth In The European Union," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 6, pages 163-169, December.
    3. Mandelman, Federico S., 2016. "Labor market polarization and international macroeconomic dynamics," Journal of Monetary Economics, Elsevier, vol. 79(C), pages 1-16.
    4. Bruno Chiarini & Maria Ferrara & Elisabetta Marzano, 2020. "Tax Evasion, Investment Shocks, and the Consumption Puzzle: A DSGE Analysis with Financial Frictions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(4), pages 907-932, June.
    5. Levaggi, Rosella & Menoncin, Francesco, 2013. "Optimal dynamic tax evasion," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2157-2167.
    6. Michael Pickhardt & Jordi Sardà, "undated". "Cash, Hoarding and the Underground Economy," Working Papers 201282, Institute of Spatial and Housing Economics, Munster Universitary.
    7. Bruno Chiarini & Maria Ferrara & Elisabetta Marzano, 2016. "Investment Shocks, Tax Evasion and the Consumption Puzzle: A DSGE Analysis with Financial Frictions," CESifo Working Paper Series 6015, CESifo.
    8. Levaggi, Rosella & Menoncin, Francesco, 2016. "Optimal dynamic tax evasion: A portfolio approach," Journal of Economic Behavior & Organization, Elsevier, vol. 124(C), pages 115-129.
    9. Levaggi, Rosella & Menoncin, Francesco, 2012. "Tax audits, fines and optimal tax evasion in a dynamic context," Economics Letters, Elsevier, vol. 117(1), pages 318-321.
    10. Laopodis, Nikiforos T. & Merika, Anna A. & Triantafillou, Annie, 2016. "Unraveling the political budget cycle nexus in Greece," Research in International Business and Finance, Elsevier, vol. 36(C), pages 13-27.
    11. Tingting Xiao & Ke Liu & Kin Keung Lai, 2014. "Tax Evasion: A Two-Period Model," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 31(03), pages 1-21.
    12. Rosella Levaggi & Francesco Menoncin, 2016. "Dynamic tax evasion with audits based on visible consumption," Journal of Economics, Springer, vol. 119(2), pages 131-146, October.
    13. Laszlo Gulyas & Tamás Mahr & Istvan Janos Toth, 2015. "Factors to Curb Tax Evasion: Evidences from the TAXSIM Agent-Based Simulation Model," CERS-IE WORKING PAPERS 1521, Institute of Economics, Centre for Economic and Regional Studies.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Richard J. Cebula, 2014. "The underground economy in the U.S.A.: preliminary new evidence on the impact of income tax rates (and other factors) on aggregate tax evasion 1975-2008," PSL Quarterly Review, Economia civile, vol. 67(271), pages 451-481.
    2. Richard J. Cebula, 2013. "New and Current Evidence on Determinants of Aggregate Federal Personal Income Tax Evasion in the United States," American Journal of Economics and Sociology, Wiley Blackwell, vol. 72(3), pages 701-731, July.
    3. Richard J. Cebula, 2001. "Impact of income-detection technology and other factors on aggregate income tax evasion:the case of the United States," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 54(219), pages 401-415.
    4. Cebula, Richard & Foley, Maggie, 2010. "Personal Income Tax Evasion Determinants Revisited: An Exploratory Study Using Newly Available Data," MPRA Paper 52028, University Library of Munich, Germany.
    5. Feige, Edgar L. & Cebula, Richard, 2011. "America’s unreported economy: measuring the size, growth and determinants of income tax evasion in the U.S," MPRA Paper 34781, University Library of Munich, Germany.
    6. Cebula, Richard J. & Coombs, Christopher & Yang, Bill Z., 2009. "The Tax Reform Act of 1986: An Assessment in Terms of Tax Compliance Behavior," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 62(2), pages 145-162.
    7. Boylan, Robert & Cebula, Richard & Foley, Maggie & Izard, Douglass, 2014. "Implication of Recent Federal Personal Income Tax Increases for Income Tax Evasion, Tax Revenues, and Budget Deficits," MPRA Paper 68405, University Library of Munich, Germany.
    8. Cebula, Richard J., 2011. "Aggregate Income Tax Evasion: Empirical Results Using new IRS Data for the U.S. - L’evasione aggregata del reddito: risultati empirici ottenuti utilizzando i nuovi dati IRS per gli USA," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 64(4), pages 423-443.
    9. R.J. Cebula, 1998. "Determinants of aggregate income-tax-evasion behaviour: the case of US," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 51(206), pages 273-290.
    10. Richard J. Cebula, 2014. "Where Has The Currency Gone? And Why? The Underground Economy And Personal Income Tax Evasion In The U.S., 1970-2008," Review of Economic Analysis, Digital Initiatives at the University of Waterloo Library, vol. 6(1), pages 36-52, June.
    11. Richard Cebula & Chris Paul, 2000. "The pedagogy of tax evasion: Its extent and its determinants," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 6(4), pages 710-721, November.
    12. Cebula, Richard, 1996. "An Empirical Analysis of the Impact of Government Tax and Auditing Policies on the Size of the Underground Economy: The Case of the United States, 1973-94," MPRA Paper 49810, University Library of Munich, Germany.
    13. Çule, Monika & Fulton, Murray, 2009. "Business culture and tax evasion: Why corruption and the unofficial economy can persist," Journal of Economic Behavior & Organization, Elsevier, vol. 72(3), pages 811-822, December.
    14. Cebula, Richard & Toma, Michael, 2004. "Do Budget Deficits Reduce Household Taxpayer Compliance? Preliminary Evidence Using the Feige Data," MPRA Paper 56739, University Library of Munich, Germany.
    15. Friedrich Schneider & Dominik Enste, 1999. "Shadow Economies Around the World - Size, Causes, and Consequences," CESifo Working Paper Series 196, CESifo.
    16. Eisenhauer, Joseph G., 2008. "Ethical preferences, risk aversion, and taxpayer behavior," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 37(1), pages 45-63, February.
    17. James, Simon & Edwards, Alison, 2010. "An annotated bibliography of tax compliance and tax compliance costs," MPRA Paper 26106, University Library of Munich, Germany.
    18. Friedrich Schneider & Robert Klinglmair, 2004. "Shadow economies around the world: what do we know?," Economics working papers 2004-03, Department of Economics, Johannes Kepler University Linz, Austria.
    19. Semjén, András, 2017. "Az adózói magatartás különféle magyarázatai [Various explanations for tax compliance]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(2), pages 140-184.
    20. Bayer, Ralph-C & Sutter, Matthias, 2009. "The excess burden of tax evasion--An experimental detection-concealment contest," European Economic Review, Elsevier, vol. 53(5), pages 527-543, July.

    More about this item

    Keywords

    Underground economy; unreported economy; tax evasion; tax gap; non compliance; Federal income tax;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

    NEP fields

    This paper has been announced in the following NEP Reports:

    Lists

    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. 地下経済 in Wikipedia Japanese

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:29672. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.