Working Paper: NBER ID: w3078
Authors: Helen V. Tauchen; Ann Dryden Witte; Kurt J. Beron
Abstract: In this paper, we analyze the tax compliance behavior of US taxpayers by using a 1979 data set that combines information from a random sample of individual tax returns each of which has been thoroughly audited, IRS administrative records, and sociodemographic data from the Census. We find evidence that both audits and tax code provisions affect compliance. However, the effects are significant for only the low and high income groups. Interestingly, previous research has shown that these groups also participate most actively in underground economic activities, the income from which is not reported on any tax returns. Our results for audits suggest that the "ripple" or general deterrent effect of audits may be many times larger than the direct revenue yield of audits for high income taxpayers. Our results for allowable subtractions from income imply that the 1986 Tax Reform Act changes to lower allowable subtractions may have procompliance effects.
Keywords: Tax Compliance; Audits; Tax Code Provisions; Income Tax Returns
JEL Codes: H26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| audits (M42) | compliance behavior (K40) |
| audits (M42) | reported income (high-income individuals) (H26) |
| 10% increase in audits (M42) | 14% increase in reported income (high-income taxpayers) (H26) |
| audits (M42) | indirect revenue yield (H27) |
| higher allowable subtractions (H20) | lower reported income (E25) |
| lower reported income (E25) | more attractive underreporting (C52) |
| decrease in allowed subtractions (H20) | increase in direct revenue (H27) |
| decrease in allowed subtractions (H20) | enhance compliance indirectly (L59) |
| higher expected costs associated with audits (M42) | enhance compliance indirectly (L59) |