Working Paper: CEPR ID: DP15851
Authors: John Guyton; Patrick Langetieg; Daniel Reck; Max Risch; Gabriel Zucman
Abstract: This paper studies tax evasion at the top of the U.S. income distribution using IRS micro-data from (i) random audits, (ii) targeted enforcement activities, and (iii) operational audits. Drawing on this unique combination of data, we demonstrate empirically that random audits underestimate tax evasion at the top of the income distribution. Specifically, random audits do not capture most tax evasion through offshore accounts and pass-through businesses, both of which are quantitatively important at the top. We provide a theoretical explanation for this phenomenon, and we construct new estimates of the size and distribution of tax noncompliance in the United States. In our model, individuals can adopt a technology that would better conceal evasion at some fixed cost. Risk preferences and relatively high audit rates at the top drive the adoption of such sophisticated evasion technologies by high-income individuals. Consequently, random audits, which do not detect most sophisticated evasion, underestimate top tax evasion. After correcting for this bias, we find that unreported income as a fraction of true income rises from 7% in the bottom 50% to more than 20% in the top 1%, of which 6 percentage points correspond to undetected sophisticated evasion. Accounting for tax evasion increases the top 1% fiscal income share significantly.
Keywords: tax evasion; inequality; tax gap
JEL Codes: H26; D63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| random audits (M42) | underestimate tax evasion among high-income individuals (H26) |
| sophisticated evasion technologies (H26) | underestimate tax evasion among high-income individuals (H26) |
| audit intensity (M42) | compliance behavior (K40) |
| unreported income (H26) | true income (E25) |
| accounting for tax evasion (H26) | top 1% fiscal income share (D33) |
| adjustments to estimates of underreported income (H26) | understanding inequality (I24) |
| high audit rates (H26) | sophisticated evasion technologies (H26) |