Spatiality and Persistence in U.S. Individual Income Tax Compliance

Abstract

This paper examines the twin issues of spatiality and persistence in the individual income tax evasion decision. The issue of persistence arises through accumulated learning over time; spatiality arises for several reasons, including the exchange of information between taxpayers, the social norm of tax compliance, and the diffi culties faced by individuals with dynamic stochastic decision problems like tax evasion. The paper uses state-level, time-series, cross-section data for the years 1979 to 1997 to estimate the factors that affect per return evasion of the individual income tax. The estimation methods incorporate both spatial dependence and dynamic considerations; they also consider the potential endogeneity of the audit rate. The empirical results provide strong and robust support for both spatiality and persistence in tax evasion. The results also show a large deterrent effect from higher audit rates.

New and Current Evidence on Determinants of Aggregate Federal Personal Income Tax Evasion in the United States

“…Furthermore, this effect may be reinforced to the extent that a higher unemployment creates an incentive even for still-employed people to avoid taxes to the degree that they try to covet extra funds (by underreporting income) in anticipation of a possible future lay-off (Alm and Yunus 2009;Gahramanov 2009;Cebula and Coombs 2009). As a result, Equation (4) is expanded to Equation (5):…”

“…The expected gross costs of not reporting income to the IRS are hypothesized to be an increasing function of the expected risks/ costs thereof (Alm, Jackson, and McKee 1992;Pestieau, Possen, and Slutsky 1994;Erard and Feinstein 1994;Caballe and Panades 1997;Alm and Yunus 2009;Cebula and Coombs 2009). In this study, to the representative economic agent, the expected risks/costs from not reporting or from underreporting taxable income to the IRS are enhanced by an increase in AUDIT, the percentage of filed federal personal income tax returns that is formally audited by IRS examiners, ceteris paribus.…”

“…Second, there are a number of studies that either (a) use questionnaires or (b) undertake experiments, such as Spicer and Lundsted (1976), Spicer and Thomas (1982), Baldry (1987), Alm, Jackson, and McKee (1992), Thurman (1991), and Alm, McClelland, and Schulze (1999). Third, there are those studies that use what is referred to as "official data," such as Tanzi (1982Tanzi ( , 1983, Clotfelter (1983), Carson (1984), Long and Gwartney (1987), Pyle (1989), Feinstein (1991), Erard and Feinstein (1994), Feige (1994), Cebula (2001Cebula ( , 2004, Ali, Cecil, and Knoblett (2001), Ledbetter (2004Ledbetter ( , 2007, Cebula and Coombs (2009), and Alm and Yunus (2009).…”

“…To date, the empirical literature has effectively failed to investigate determinants of aggregate personal income tax evasion in the United States for recent years; indeed, except for a single somewhat narrowly focused study that investigated tax evasion and government-spendinginduced budget deficits through the year 2001 (Cebula and Coombs 2009), the most recent year considered in the tax evasion determinants literature is in fact 1997 (Cebula 2004(Cebula , 2008Ali, Cecil, and Knoblett 2001;Alm and Yunus 2009). However, the IRS (2010) has very recently released new time-series data on tax evasion running through the year 2005.…”

“…Next, based on Alm and Yunus (2009), Gahramanov (2009), and Cebula and Coombs (2009, it is expected that the higher the unemployment rate (UN), the greater the expected benefits of personal income tax evasion, ceteris paribus. This is based on the reasoning…”