NCPA - National Center for Policy Analysis

Unpaid Taxes

April 16, 2001

Why aren't more people upset by the complexity, unfairness and high level of taxes? One theory is that some people are giving themselves a tax cut -- otherwise known as tax cheating.

According to November 2000 issue of the Department of Commerce's Survey of Current Business:

  • In 1998, businesses paid out $6,087.7 billion of taxable income to individuals, including wages and salaries, pensions, interest, dividends and other forms of income.
  • But only $5,389.3 billion showed up on tax returns, leaving a gap of $695.4 billion.
  • Assuming that the first figure is correct, this means that 11.4 percent of adjusted gross income (AGI) was neither reported nor taxed in 1998.

Looking at the AGI gap over time gives us a pretty good idea of whether tax evasion is rising or falling. The highest figure recorded since 1959 was 13.5 percent in 1984, and the lowest was 9 percent in 1968-69. In recent years, the AGI gap has been as high as 12.9 percent in 1994, falling more or less steadily to its present level (see figure).

It is difficult to know how much tax was evaded, because it would be a function of each individual's tax bracket. But assuming the unreported income would have been taxed at the same average rate as reported income, which was 20.9 percent in 1998, this suggests that about $145 billion in federal income taxes were evaded that year.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, April 16, 2001.


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