Measuring Income Tax Evasion in the United States

February 3, 2012

A new study by two professors of economics, Richard Cebula, of Jacksonville University, and Edgar L. Feige, of the University of Wisconsin, seeks to determine the amount of annual tax evasion and the factors that are relevant in encouraging it.

  • The last IRS attempt to measure the amount of taxes that the IRS does not receive due to tax evasion was conducted in 2001; it arrived at a total of $345 billion.
  • These researchers, however, estimate it has grown in recent years and found that some $2 trillion in individual income is unreported to the IRS, constituting between 18 and 19 percent of total taxable income.
  • This total would result in an additional $450 billion to $500 billion in income tax revenue for the federal government.

Tax evasion is not a new phenomenon: taxpayers and market participants respond to incentives.  So long as they find money desirable, they will resist efforts (even legal ones) to take it from them.  For this reason, the researchers also conducted an in-depth study of factors they considered relevant to tax evasion in order to find out their respective degrees of impact.  Each of the following variables was found to be significant to a 95 percent level of confidence:

  • The average effective federal income tax rate.
  • The unemployment rate in the civilian labor force.
  • Public dissatisfaction with government.

The first variable is perhaps the most significant as politicians debate the merits of additional tax increases.  The study found that taxpayers respond in a number of ways in order to avoid the burden of higher taxes, including working less, exploiting tax loopholes and illegal forms of tax evasion.

The Left's solution to this problem is that, in tandem with tax increases, the IRS should have its auditing capacity augmented.  However, the study also found that the impact of an empowered IRS is insignificant in reducing tax evasion.

Source: Richard Cebula and Edgar L. Feige, "America's Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S.," University of Wisconsin, 2011.

For text:

http://www.ssc.wisc.edu/econ/archive/wp2011-1.pdf

 

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