Working Paper: NBER ID: w2733
Authors: Joel Slemrod
Abstract: Tax return data, which has been a principal source for econometric investigations of the behavioral response to tax policy, is subject to misreporting that may bias estimates of tax responsiveness. The misreporting arises because understatement of taxable income may itself be a function of an individuals marginal tax rate, it being the return to a dollar of understated taxable income. To the extent that misreporting of income and deductions is a function of the same factors that determine the behavior under study, estimated relationships based on reported data will reveal a composite of the tax (and income) responsiveness of the actual behavior and of the misreporting of the behavior. This paper used data from tax returns that have been subject to intensive audits to confront the quantitative importance of misreporting for the estimated tax responsiveness of charitable contributions. This has been the subject of numerous empirical studies using tax return data which use a common empirical framework. It concludes that the tax responsiveness of charitable giving that has been detected using tax return data cannot be ascribed to the tax responsiveness of overstating actual giving In fact. overstatement is apparently less price responsive than actual giving, implying that the responsiveness of actual giving is higher than is suggested by studying reported contributions.
Keywords: tax elasticity; charitable contributions; tax evasion; misreporting
JEL Codes: H24; H26; C21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Marginal tax rate (H29) | Likelihood of misreporting contributions (D64) |
| Misreporting contributions (H26) | Estimated tax responsiveness (H30) |
| Actual contributions (D64) | Estimated tax responsiveness (H30) |
| Reported contributions (D64) | Estimated tax responsiveness (H30) |
| Overstatement of contributions (D64) | Tax responsiveness of overstating actual giving (D64) |
| Reported contributions (D64) | Auditor-adjusted contributions (M41) |
| Ignoring distinction between reported and actual contributions (D64) | Biased estimates of responsiveness of reported contributions (C83) |