The effects of tax rates and enforcement policies on taxpayer compliance: A study of self-employed taxpayers

Abstract

This paper presents an econometric analysis of taxpayer compliance, exploring its relationship with audit rates, penalties if detected, tax rate schedule, income level, and sources of self-employment income. Using data drawn from theAnnual Report of the Commissioner of Internal Revenue Service [IRS, various] and the Data Book [IRS, various]for 1980 to 1995, the audit rate and penalty rate are both effective deterrents to noncompliance. The effectiveness of these two policy instruments depends upon the individual's level of income. It seems the higher the income level, the more effective these instruments are. In general, compliance increases with the level of income but at a decreasing rate. It is also found that individuals tend to comply less as the marginal tax rate rises. Again, such tendency is more pronounced for high-income taxpayers than for low-income taxpayers. (JEL H20, H24, H26) *University of Kentucky--U.S.A. *" Francis Marion University--U.S.A. The authors are grateful to an anonymous referee for helpful comments and suggestions. 186ALI ET AL.: TAXPAYER COMPLIANCE 187 various]. The audit rate and penalty rate both serve as effective deterrents to noncompliance. The effectiveness of these two policy instruments depends upon the individual's level of income. It seems the higher the income level, the more effective these instruments are. In general, compliance increases with the level of income but at a decreasing rate. It is also found that individuals tend to comply less as the marginal tax rate rises. Again, such tendency is more pronounced for high-income taxpayers than for low-income taxpayers.The plan for this study is as follows. The second section reviews the existing theoretical and empirical literature on tax compliance. The third section develops an econometric model for tax compliance. The fourth section reports the estimated model and presents new empirical evidence on how audit rates, penalty rates and tax rates affect compliance. Some concluding remarks are presented in the fifth section.

Does Perceived Corruption Moderate the Relationship Between Economic Factors and Tax Compliance? A Proposed Framework for Nigerian Small and Medium Enterprises

“…More evidence revealed a high tax rate to be positively related to tax evasion as well as negatively related to tax compliance (Ali, Cecil, & Knoblett, 2001;Christian & Gupta, 1993). Modugu, Eragbhe, and Izedonmi (2012) and Richardson (2006) recently showed that tax rate does predict positive or negative relationship on tax compliance.…”

Teaching the economics of income tax evasion

“…Among, the types of information thusly obtained and analyzed are data on the magnitude of income tax evasion in the economy, income tax rates, and audit rates. Such studies endeavor typically either to estimate the aggregate degree of tax evasion or to identify the determinants thereof (Bawley, 1982;Tanzi, 1982Tanzi, , 1983Clotfelter, 1983;Carson, 1984;Long & Gwartney, 1987;Musgrave, 1987;Pyle, 1989;Feinstein, 1991;Klepper, Nagin & Spurr, 1991;Erard & Feinstein, 1994;Feige, 1994;Pozo, 1996;Cebula, 2001Cebula, , 2004Cebula, , 2008Ali, Cecil, & Knoblett, 2001;Ledbetter, 2004;Connelly, 2004;Alm & Yunus, 2009;Cebula & Coombs, 2009). …”

America’s unreported economy: measuring the size, growth and determinants of income tax evasion in the U.S.

“…Moreover, employed workers, fearing future job losses, may also underreport income as a means of hedging against expected future unemployment. We also expect tax evasion to be positively related to real income (INC) since higher income individuals are more likely to report income on Schedule C for which there are no information reporting or withholding requirements (Ali, Cecil & Knoblett, 2001) Noncompliance with the tax code is also believed to be related to the public's dissatisfaction with the government (DIS). Taxes are more willingly paid when taxpayers believe that tax revenues are being wisely employed to provide public services.…”