Working Paper: NBER ID: w31376
Authors: William C. Boning; Nathaniel Hendren; Ben Sprung-Keyser; Ellen Stuart
Abstract: We estimate the returns to IRS audits of taxpayers across the income distribution. We find an additional $1 spent auditing taxpayers above the 90th income percentile yields more than $12 in revenue, while audits of below-median income taxpayers yield $5. We draw upon comprehensive internal accounting information and audit-level enforcement logs to quantify the average costs and revenues associated with each audit. We begin by estimating the average initial return to all audits of US taxpayers filing in 2010-2014. On average, $1 in audit spending raises $2.17 in initial revenue. Audits of high-income taxpayers are more costly, but the additional revenue raised more than offsets the costs. Audits of the 99-99.9th percentile have a 3.2:1 return; audits of the top 0.1% return 6.3:1. We then exploit the 40% audit reduction between tax years 2010 and 2014 to examine the returns to marginal audits. We find they exceed the returns to average audits. Revenues remain relatively unchanged but marginal costs fall below average costs due to economies of scale. Next, we use randomly selected audits to examine the impact of an initial audit on future revenue. This specific deterrence effect produces at least three times more revenue than the initial audit. Deterrence effects are relatively consistent across the income distribution. This results in the 12:1 return above the 90th percentile. We conclude by estimating the welfare consequences of audits using the MVPF framework and comparing audits to other revenue raising policies. We find that audits raise revenue at lower welfare cost.
Keywords: No keywords provided
JEL Codes: H0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| IRS audits (H26) | tax revenue (H27) |
| additional dollar spent auditing high-income taxpayers (H26) | tax revenue (H27) |
| audits of below-median income taxpayers (H26) | tax revenue (H27) |
| average audits across all income levels (D31) | tax revenue (H27) |
| audits of the 99.999th percentile (C80) | tax revenue (H27) |
| audits of the top 0.1% (H83) | tax revenue (H27) |
| initial audit (M42) | increased future tax payments (H29) |
| audits above the 90th percentile (Y10) | increased future tax payments (H29) |
| audits (M42) | welfare cost (D69) |
| audits raise revenue (H27) | lower welfare cost (D69) |