income tax evasion revisited the impact of interest rate yields on tax free municipal bonds 1 introductionincome tax evasion remains a timely issue as evidenced by recently published studies e g see feige 1989 1994 alm jackson and mckee 1992 pestieau possen and slutsky 1994 cebula 1997 2001 alm mcclelland and schulze 1999 atkins 1999 panteghini 2000 ali cecil and knoblett 2001 saltz 2001 in an effort to provide further insight into the determinants of tax evasion this study hypothesizes that the tax evasion decision may include an assessment of the tax free interest rate yield on say high grade municipal bonds relative to the taxable interest rate yield on alternative high quality bond issues such as 10 year treasury notes presumably the higher the interest rate yield on high grade municipals whose interest is legally exempt from federal income taxation relative to the taxable interest rate yield on 10 year treasury notes the more attractive those municipals become ceteris paribus in effect the interest paid on tax free bonds especially for households in higher tax brackets may offer an attractive legal alternative income tax avoidance to illegal income tax evasion 1 thus it is hypothesized that the higher the tax free interest rate yield on high grade municipals relative to the taxable yield on 10 year treasury notes or equivalent taxable issues the less the incentive for and hence the less the degree of income tax evasion this study investigates empirically whether higher yields on tax free municipals relative to the taxable yields on 10 year treasury notes reduce the degree of aggregate federal personal income tax evasion section 2 provides the model which includes a variety of variables already established in the literature to affect tax evasion section 3 describes the data sections 4 and 5 provide the empirical findings and concluding remarks 2 the modelthe economy consists of agents who generate economic value that is reflected in the form of income and choose whether to report none some or all of their income to the internal revenue service irs the probability that the representative economic agent will not report taxable income pnr is treated as an increasing function of the expected gross benefits to the agent of not reporting income eb and a decreasing function of the expected gross costs to the agent of not reporting income ec formula omitted see article image the expected gross benefits from not reporting income to the irs are hypothesized to be an increasing function of income tax rates unlike previous studies this study focuses on both the average effective federal personal income tax rate aept and the maximum marginal federal personal income tax rate max such that formula omitted see article image furthermore as suggested by feige 1994 and cebula 2001 the higher the level of public dissatisfaction dis with the perceived performance of government employees and elected government officials the greater the subjective benefit taxpayers derive from tax evasion accordingly becomes formula omitted see article image finally as explained in section 1 it is hypothesized in this study that the higher the tax free interest rate yield on high grade municipal bonds tf relative to the taxable interest rate yield on 10 year treasury notes ten the greater the incentive to engage in legal tax avoidance and the lower the incentive to engage in tax evasion thus becomes formula omitted see article image the expected gross costs of not reporting income to the irs are hypothesized to be an increasing function of the expected risks thereof in this study to the representative economic agent the expected penalty from not reporting taxable income to the irs if said activity is detected by the irs is measured in part by the total pecuniary penalties including both penalties per se and interest previously assessed by the irs on audited tax returns pen

tax evasion under random audits with uncertain detection abstract we show that an increase in taxpayer uncertainty about the amount of tax evasion that will be detected if an audit is undertaken increases compliance for prudent taxpayers if they believe that they will be assessed at least the amount of tax evaded thus a policy that fosters detection uncertainty is more likely to encourage compliance the higher is the penalty for tax evasion

randomization of commodity taxes an expenditure minimization approach using an expenditure minimization approach necessary and sufficient conditions for local random taxation are obtained in terms of the curvature of the compensated demand function so that intuition from excess burden analysis can be applied major findings include 1 random taxation is locally optimal if the compensated demand function is sufficiently convex 2 horizontally equitable taxation is locally optimal if the compensated demand function is concave and 3 local randomization is not optimal if the tax revenue requirement is sufficiently close to zero or to any local maximum we also derive an inverse elasticity characterization of the optimal random tax structure

employer tax evasion in the unemployment insurance program we use unique data to analyze employer tax compliance with unemployment insurance ui provisions the data indicate that employers may have underreported 728 million of ui taxes nationally in 1987 alone to formally examine this noncompliance a theoretical model of payroll tax evasion is developed showing that increasing payroll tax rates among other things likely increases noncompliance by risk neutral firms this prediction is empirically verified the finding that ui tax evasion is systematically related to various firm characteristics suggests that ui audits may be effectively targeted by statistical profiles derived from our model thereby improving compliance

neoclassical labour market dynamics chaos and the real wage phillips curve abstract the relationship between wage inflation and unemployment has been extensively investigated since the early work of phillips phillips a w 1958 the relation between unemployment and the rate of change of money wage rates in the u k 1861 1957 economica 25 283 299 and lipsey lipsey r g 1960 the relation between unemployment and the rate of change of money wage rates in the u k 1861 1957 a further analysis economica 27 1 31 and it is still a matter of debate in this paper we study the dynamics of a standard neoclassical labour market under the simplest walrasian adjustment rule we show that when consumption and leisure are sufficiently low substitutes the unique walrasian equilibrium of the economy can be destabilised and regular or even chaotic fluctuations of wages and employment appear this leads to an interesting resurrection of a real wage phillips curve as a long term phenomenon

tax evasion and uncertainty in a dynamic context we study optimal dynamic compliance decisions in an uncertain environment contrary to the static literature greater uncertainty affects consumption not the optimal tax evasion rule thus audit and sanctions rather than fiscal uncertainty should be used to control tax evasion

cross country evidence on the distributional impact of fiscal policy abstractthis article provides new evidence on the distributional effects of fiscal policy using data on a panel of oecd economies over the last four decades we study how four measures of income in

convergence in european gdp series convergence in gross domestic product series of five european countries is empirically identified using multivariate time series models that are based on unobserved components with dynamic con verging properties we define convergence in terms of a decrease in dispersion over time and model this decrease via mechanisms that allow for gradual reductions in the ranks of covariance matrices associated with the disturbance vectors driving the unobserved components of the model the inclusion of such convergence mechanisms within the formulation of unobserved components makes the identification of various types of convergence possible the common converging component model is estimated for the per capita gross domestic product of five european countries germany france italy spain and the netherlands it is found that convergence features in trends and cycles are present and are associated with some key events in the history of european integration

are women more risk averse we find that single women exhibit relatively more risk aversion in financial decision making than single men using u s sample data we examine household holdings of risky assets to determine whether there are gender differences in financial risk taking as wealth increases the proportion of wealth held as risky assets is estimated to increase by a smaller amount for single women than for single men gender differences in financial risk taking are also influenced by age race and number of children greater financial risk aversion may provide an explanation for women s lower levels of wealth compared with men s jel j16 d81 g11

the effects of income tax rate uncertainty in a dynamic setting most discussion of income tax policy focuses on the expected efficiency or equity gains that could result from alterations in income tax codes often overlooked is the uncertainty that is generated when taxpayers anticipate a change in the tax laws for example over the last decade the income tax codes in the u s have undergone three significant revisions and while each of these revisions was accompanied by extensive debate concerning the effects of changes in particular statutory provisions the uncertainty generated by such rapid changes in the tax codes received little attention it is likely that the timing of these revisions as well as the revisions themselves were difficult to predict and consequently contributed to the uncertainty facing taxpayers while income tax codes may be subject to a wide variety of changes arguably the most consequential is a change in tax rates given a fixed tax base with a fixed tax base changes in statutory tax rates translate into changes in effective tax rates because changes in effective rates have such a pervasive influence on decision making it seems reasonable to expect that uncertainty regarding future effective tax rates may have serious consequences we explore the impact of this particular form of tax code uncertainty on an individual s saving and portfolio decision making in a dynamic setting throughout our analysis the tax base is unchanging so that we do not bother to distinguish between effective and statutory tax rates in this setting we assume that the timing of tax rate changes is uncertain and that if a change occurs the new tax rate is unpredictable we find that more less risk averse taxpayers will respond to an increase in the likelihood of a change in the tax code or an increase in the variability of future tax rates by increasing decreasing saving we are also able to characterize those situations in which an increase in the likelihood of a change in the tax code or an increase in the variability of future tax rates will depress risk taking there is a growing literature that examines the effects of income tax uncertainty for example auerbach and poterba 3 and bernheim 4 have dealt with uncertainty that alters a firm s taxable income and consequently the effective tax rate faced by the firm auerbach and hines 2 have analyzed corporate investment behavior in the u s by taking into account the possibility that investors anticipate future changes in tax laws models that examine the welfare consequences of uncertain tax rates have been developed by weiss 9 in a static setting and by bizer and judd 5 in a dynamic setting estimates of the welfare costs associated with statutory tax uncertainty in

the asymmetric response of gasoline prices to oil price shocks and policy uncertainty abstract this study shows that the effect of oil price shocks on the real price of gasoline is interrelated with economic policy uncertainty economic policy shocks are linked with increased real price of gasoline and reduced consumption of gasoline there is evidence that the fluctuation of both real gasoline prices and of gasoline consumption is associated with uncertainty of tax legislation expiration expectation as well as other components of economic policy uncertainty positive shocks to economic policy uncertainty have relatively larger effects on gasoline prices than do negative shocks to economic policy uncertainty economic policy uncertainty responds asymmetrically to increases and decreases in real oil price shocks to economic policy uncertainty account for 16 1 of variation in real gasoline prices and for 4 9 of variation in gasoline consumption in the long run

how income transfer programs affect work savings and the income distribution a critical review for helpful comments on earlier drafts we thank without implicating moses abramovitz yves balcer john bishop alan blinder richard burkhauser michael darby irwin garfinkel alan gustman daniel hamermesh martin holmer george jakubson robert lampman paul menchik robert moffitt michael murray joseph quinn timothy smeeding eugene smolensky barbara wolfe and two anonymous referees

are the penn world tables data on government consumption and investment being misused abstract this paper argues that it is inappropriate to measure g y and i y using penn world tables data the empirical results of barro and lee carnegie rochester conference series on public policy 40 1994 1 46 are sensitive to whether g y and i y are measured in local or international prices

getting the word out enforcement information dissemination and compliance behavior the question for the tax authority is how individuals become aware of enforcement effort to be an effective tool in reducing tax evasion taxpayers must be aware of the current audit and penalty regime we use laboratory experiments to examine the compliance impact of types of information dissemination regarding audit frequency and results the information includes official information disseminated by the tax authority and unofficial or informal communications among taxpayers our results indicate that the effect of the type of post audit information is conditional on whether the taxpayer is well informed of the audit rate prior to filing we find that the tax authority would be served by pre announcing audit rates credibly and by emphasizing the previous period audit frequency in annual reporting of enforcement effort

does africa need a rotten kin theorem experimental evidence from village economies this paper measures the economic impact of social pressure to share income with kin and neighbors in rural kenyan villages the authors conduct a lab experiment in which they randomly vary the observability of investment returns the goal is to test whether subjects reduce their income in order to keep it hidden the analysis finds that women adopt an investment strategy that conceals the size of their initial endowment in the experiment although that strategy reduces their expected earnings this effect is largest among women with relatives attending the experiment parameter estimates suggest that women behave as though they expect to be pressured to share four percent of their observable income with others and substantially more when close kin can observe income directly although this paper provides experimental evidence from a single african country observational studies suggest that similar pressure from kin may be prevalent in many rural areas throughout sub saharan africa

on the complexities of complex economic dynamics complex economic nonlinear dynamics endogenously do not converge to a point a limit cycle or an explosion their study developed out of earlier studies of cybernetic catastrophic and chaotic systems complexity analysis stresses interactions among dispersed agents without a global controller tangled hierarchies adaptive learning evolution and novelty and out of equilibrium dynamics complexity methods include interacting particle systems self organized criticality and evolutionary game theory to simulate artificial stock markets and other phenomena theoretically bounded rationality replaces rational expectations complexity theory influences empirical methods and restructures policy debates

plea bargaining with the irs extensions and further results abstract chu journal of public economics 41 1990 319 333 proposes a tax scheme called fatota under which taxpayers are given the choice between paying a fixed amount of taxes and thus being exempted from tax audit or paying only what taxpayers claim they owe and being subject to tax audits for possible evasion in this paper we extend chu s finding with regard to the pareto improving property of fatota to a more general setting including nonlinear tax penalty schedules complicated audit rules and endogenous labor supply we also show that any tax system in which the highest income taxpayer faces audit risk and or tax distortion can be pareto improved upon by the introduction of fatota we relate this result to seade s journal of public economics 7 1977 203 235 celebrated finding in the optimal taxation literature that any income tax schedule with a positive marginal tax rate at the top of the scale can be replaced by another tax schedule which is strictly pareto improving

efficient tax reporting the effects of taxpayer liability information services the complexity of the individual income tax system can give rise to both under and overreporting of liability thus creating a wedge between taxpayer perceptions of the price of public services and their actual cost and potentially leading to budget misallocations and associated efficiency losses this study uses theory and experiments to evaluate the effectiveness of taxpayer service programs that endeavor to resolve uncertainty over tax liability to do so we induce uncertainty over tax liability and investigate the effects of both service accuracy and reliability we find participants are less likely to file when tax liability is uncertain but the provision of information offsets this effect furthermore it appears that simply providing a service even one that imperfectly reveals liability increases the propensity to file and the accuracy of the filing when a service that promises to resolve uncertainty completely is requested but not delivered the result is underreporting even more severe than in a setting where no service is available jel h2 h26 c91

employer sanctions on hiring illegal labor an experimental analysis of firm compliance abstract the employer sanctions provision of the 1986 immigration reform and control act penalizes employers who knowingly hire unauthorized workers under irca employers are subject to civil and or criminal penalties however given the widespread availability of counterfeit documentation in some cases it becomes difficult to discern the employment eligibility status of some workers using experimental methods this study provides some evidence that marginal increases in employer compliance rates are significantly higher when employers have perfect information on the employment eligibility status of its potential workers than when they do not the experimental results suggest that increases in government spending for employer sanctions enforcement may be more effective if the informational asymmetry faced by employers is solved first a possible solution to this problem may lie in the adoption of tamper proof documentation such as a national identification card

the optimal size of a tax collection agency the condition that characterizes the optimal size of a tax collection agency is derived and then given a simple interpretation in terms of excess burden the paper clarifies an earlier finding of sandmo which suggests that the optimal degree of enforcement is higher than a simple cost benefit calculation would indicate the appropriate condition is that at the margin the resource cost of increasing enforcement should equal the saving of excess burden due to the decline in exposure to risk the increased revenue gained from stricter enforcement does not enter the expression because it merely represents a transfer among the economy s identical agents

on the internal revenue service s service and enforcement i introduction the internal revenue service irs services as well as audits taxpayers the irs provides taxpayer service through a variety of channels including its website toll free telephone lines and the taxpayer assistance center for fy 2008 the irs budget request includes 3 6 billion for taxpayer service and 7 2 billion for enforcement everson 2007 in the assessment of the fy 2009 irs budget request the government accountability office gao 2008 1 points out that effective tax administration requires a balance of service and enforcement and enforcement efforts should be combined with taxpayer service because both affect compliance although taxpayer service is an important activity of the irs s operation to our knowledge there is no formal model to address the connection between service and enforcement and more importantly its policy implications in the context of tax compliance this article seeks to take a step to fill this void we consider a simple tax compliance model which is built upon the seminal work of graetz reinganum and wilde 1986 hereafter grw unlike the classical contribution of allingham and sandmo 1972 and yitzhaki 1974 which treats the irs actions as exogenous in their analysis of tax evasion the grw model views the irs as a strategic player that interacts with taxpayers the grw model also differs from the principal agent tax evasion model first introduced by reinganum and wilde 1985 as pointed out by grw the principal agent model suffers from the time inconsistency problem as it requires that the irs announce and commit to an audit policy even though the precommitted audit policy will typically prove suboptimal once taxpayers submit their reported income grw emphasize that their interactive model follows the natural temporal sequence of decisions first taxpayers report their income and only then does the irs decide whether to perform tax audits this sequence is what we typically observe in the real world 1 however like other models on tax compliance grw consider the enforcement part but leave out the service part of the irs activities we extend the grw model to the real world in which the irs services as well as audits taxpayers similar to grw we assume that a taxpayer has either high income or low income to incorporate the role of the irs s service we also assume that taxpayers are uncertain about whether their incomes are eligible for deduction exemption and may seek advice from the taxpayer service provided by the irs to mitigate the uncertainty an important feature of our model is that in equilibrium all net tax revenues collected by the irs are from those taxpayers who voluntarily report high incomes to the irs to maximize the population of the taxpayers in this group the irs will not provide the most accurate service but only maintain an intermediate level of quality the optimal level of accuracy will be increasing as the difficulty in identifying the true income eligibility increases which may be due to more complicated tax laws moreover there exists a conflict between the irs and the society with regard to the optimal taxpayer service in that the society s preferred quality of taxpayer service is likely to be sufficiently high the conflict tends to be intensified as the cost of tax audits becomes lower our result is consistent with the trend in the united states regarding the resources allocated to the taxpayer service in the past few decades we also extend our model in the following two directions the first extension is to address the issue of corruption in tax administration many developing countries suffer from inefficiencies in tax administration and corruption arising from enforcement some authors argue that it is important for developing countries to recognize the service paradigm of tax compliance which emphasizes not only the role of enforcement but also the role of taxpayer service

conservation auctions and compliance theory and evidence from laboratory experiments many agri environmental conservation programs are faced with the problem of imperfect monitoring this provides farmers with an incentive for noncompliance because they can receive subsidies without implementing the conservation scheme in this paper bidding behavior and auction performance are compared for discriminatory price and uniform price auctions in an imperfect monitoring environment our theoretical analysis suggests that auction performances are equalized between the discriminatory price and uniform price auctions however laboratory experiments reveal that although the discriminatory price auction has an advantage in terms of reducing policy costs it is more likely to cause adverse selection as a result the uniform price auction tends to have higher efficiency and cost effectiveness when compliance behavior is taken into account

endogenous audits uncertainty and taxpayer assistance services theory and experiments abstract in recent years there has been a sharp rise in the information available to individual income taxpayers such as through tax preparation software provided by third parties and support available by tax agencies but the effects of this information on tax reporting are not well understood within a setting characterized by an endogenous audit process and taxpayer uncertainty this study uses theory and laboratory experiments to investigate the effects of taxpayer assistance services that better inform taxpayers about their tax liability and the audit process the endogenous audit rule we study is simple yet relative to existing work is more likely to characterize the actual incentives facing taxpayers among our findings and in contrast to the case of purely random audits in theory the effect of providing more accurate information on tax liability is ambiguous and we find support empirically for increased tax underreporting even in a setting where theory predicts the opposite this unanticipated result is mitigated when services provide better information on both liability and the audit process suggesting that audit information may be more salient to participants

the public and private marginal product of capital lowe gratefully acknowledges financial support from esrc award number es i02476x 1 and perez sebastian from ministerio de economia y competitividad and fondo europeo de desarrollo regional eco2015 70540 p mineco feder and the generalitat valenciana prometeo 2013 037 papageorgiou acknowledges financial support from the uk department for international development

randomness in tax enforcement abstract when there is tax evasion increased randomness about how much taxable income an auditor would assess generally leads to higher reported income and more revenue when reducing randomness is costly optimality requires some randomness in assessed taxable income even if reducing randomness is costless taxpayers may prefer some randomness when the increased revenue can be rebated so that the government s revenue stays fixed

chaotic price dynamics increasing returns and the phillips curve abstract chaotic behavior of prices can emerge as a robust result from a very simple and standard price adjustment process consider the dynamics of prices adjusting according to supply and demand in economies with increasing returns to scale increasing returns in production implies the existence of a globally attracting set of prices containing a stable disequilibrium price within which the motion of the system is chaotic this property holds for any step size in the price adjustment process when consumption and leisure are complementary we prove that long run statistical properties of the system s behavior in this set are described by an ergodic measure price dynamics drive the system into the globally attracting region and then chaotic motion takes over on average according to this measure there is excess supply we suggest possible empirical implications of our analysis particularly with respect to the relationship between wages changes and the demand for labor the phillips curve

free riding and uncertainty this paper examines the effects of uncertainty on pure public good provision and free riding behavior two models are presented in the first nash behavior is assumed and uncertainty is with respect to the contributions of the rest of the community for the second model non nash behavior is assumed and uncertainty concerns the nonzero response that a representative individual s optimizing choice will cause in the community propositions provide sufficient conditions for increased risk to worsen free riding behavior in the two models for nash behavior we also give the sufficient condition for increased risk to ameliorate free riding behavior the effects of group size on free riding are also explored for uncertain responses by the community

on the path dependence of tax compliance abstract this paper presents experimental evidence that tax compliance is path dependent for given values of the audit probability and the fine for tax evasion we compare the income declaration of subjects who faced a change in one of the two parameters to that of subjects who experienced no such parameter change we show that past tax enforcement regimes continue to have an impact on current income declarations this finding may be explained by reference dependent preferences and it has important policy implications for instance legal transplants cannot be expected to reliably yield similar behavior in countries with different legal histories

tiers in one sided matching markets theory and experimental investigation the design of a matching market may affect behavior in prematch stages in some settings forward looking agents might purchase low priced properties with the intention of trading up from a design standpoint such behavior is undesirable we investigate a tiered structure as a potential solution using a model that endogenizes prematch acquisition decisions we show that tiers promote exchange while protecting the primary market in the laboratory we find that both firm revenue and total social surplus are improved by tiered matching and the amount of improvement depends on the exchange mechanism the firm uses we focus on two popular mechanisms deposit first and request first we find that subjects are less likely to take advantage of the match under tier free deposit first mechanism possibly because of risk aversion thus a tiered approach is more critical under the request first mechanism we confirm that risk aversion partly explains deviations from theory this paper was accepted by uri gneezy

who profits from taxpayer confusion abstract when taxpayers are uncertain of true taxable income they must decide whether to resolve their uncertainty by seeking tax advice and then decide how much taxable income to report since tax advisors must sign their advisees tax returns the audit policy can depend on whether tax advice was sought in the optimal audit policy some taxpayers will not resolve their uncertainty and the optimal policy yields higher net revenue with uncertainty than without

tax uncertainty and investment a cross country empirical examination i introduction spanning a period of nearly 100 years of economic research a substantial body of literature has developed with the goal of explaining the behavior of investment over time 1 although many of these studies have considered the implications of tax policy for investment in an uncertain world most have also implicitly assumed that the tax policy itself does not contribute to the uncertainty the problem is that tax policy can be very uncertain in many cases 2 and to date we know little about the consequences especially from an empirical standpoint more generally empirical evaluations of uncertainty and investment are very limited compared with the development of theoretical analyses calcagnini and saltari 2000 and the case of tax uncertainty is no exception this article sets out to fill part of the intellectual void by empirically investigating the impact of volatility in effective tax rates on investment in a cross section of countries namely the 15 countries of the european union eu the united states and japan in doing so i first estimate tax rate volatility using an arch specification with data on effective capital tax rates i then provide panel regression results using the system generalized method of moments gmm sys estimator of arellano and bover 1995 see also blundell and bond 1998 which suggest that the volatility of effective tax rates on capital have a significant negative impact on investment per worker in these countries the remainder of the article proceeds as follows section ii briefly reviews the existing literature on tax policy uncertainty and investment as well as existing empirical studies of uncertainty in general and investment section iii develops the empirical model i employ to estimate the relationship between tax volatility and investment section iv then presents an analysis of effective tax rates in the eu countries the united states and japan followed by a discussion of the data and econometric issues in section v and an examination of the effects of tax rate volatility on investment in section vi section vii provides concluding remarks ii theoretical foundations tax policy uncertainty and investment although most of the voluminous literature on tax policy and investment under uncertainty ignores observed randomness in tax policy a recent set of literature has begun to explore these issues in some detail mostly through simulation 3 the basic premise underlying these studies is that because output price uncertainty tends to retard investment pindyck 1988 4 tax uncertainty might be expected to harm investment as well hassett and metcalf 1999 further credence to a negative relationship between tax uncertainty and investment is given by the business community s mantra that they cannot make plans if they don t have confidence in the tax structure bizer and judd 1989 223 these simulation studies however demonstrate that the impact of tax uncertainty depends crucially on the source and nature of the uncertainty contrary perhaps to conventional wisdom in some cases increased uncertainty can be shown to have positive effects on investment growth or welfare bizer and judd 1989 simulate the economic effects of introducing random tax policy in a dynamic general equilibrium model they find that if random tax rates or credits are serially correlated the target capital stock falls when taxes are high and rises when taxes are low their more interesting case considers independently and identically distributed random tax shocks in this case the authors find that randomness in investment tax credits generates large fluctuations in investment which have the effect of reducing both utility and production because both are concave functions as well revenue 5 they find that variance in future tax rates however is not important for long term investments and in fact raises nontrivial mounts of revenue at a welfare cost that is never more than the cost associated with raising an equivalent amount of revenue with a permanent increase in a deterministic tax rate

the impact of public transfer expenditures on tax evasion an experimental approach abstract this paper outlines the methodology and results of an experiment undertaken to analyze primarily the impact of public sector transfer payments on tax evasion behaviour apart from the use of transfer payments further explanatory variables used were income expected auditing probability and perceived tax burden the influence of these variables on both the propensity to evade taxes and the extent of taxes evaded are investigated in an attempt to add more realism some innovative changes to the experimental approach were incorporated

building support for taxation in developing countries experimental evidence from mexico abstract drawing on insights from the literature on institutional design how rules shape behavior to achieve desired outcomes this article examines how certain design features of taxes such as allowing for civil society oversight earmark mechanisms that direct tax revenue for a specific purpose and sunset provisions that make the duration of taxes finite affect political support for tax reforms it also evaluates how three important aspects of the fiscal exchange trust in government perceptions of the public good and level of income shape the effect of these design features based on an original survey experiment focusing on the provision of public safety in mexico i find that these design features increase political support for taxation especially among those with low trust in government and low income these findings have important implications not just for mexico but also a number of other countries across latin america that have both low levels of extraction and increased public spending imperatives

government size and economic growth a new framework and some evidence from cross section and time series data a study of the impact of government size on economic performance and growth is important theoretically one point of view suggests that a larger government size is likely to be detrimental to efficiency and economic growth because for example i government operations are often conducted inefficiently ii the regulatory process imposes excessive burdens and costs on the economic system and iii many of government s fiscal and monetary policies tend to distort economic incentives and lower the productivity of the system at the other extreme one can identify some points of view that assign to the government a critical role in the process of economic development and could argue that a larger government size is likely to be a more powerful engine of economic development there are several arguments on which the latter point of view is based these include besides others i role of the government in harmonizing conflicts between private and social interests ii prevention of exploitation of the country by foreigners and iii securing an increase in productive investment and providing a socially optimal direction for growth and development

income tax compliance and evasion a graphical approach individual income tax compliance has been one of the most significant applications of becker s 6 economic approach to criminal activity and punishment this paper considers an approach to optimal audit policies that relies on the distribution of risk aversion among taxpayers and is consistent with some stylized facts about the u s tax system rather than considering the tax evasion situation as a game between the tax collector and identical taxpayers this model has the tax collector choose an audit probability to maximize expected tax revenues net of audit costs knowing that each taxpayer has a reservation audit probability the smallest audit probability that would evoke truthful reporting depending on how averse to risk she is as the heterogeneity in the population vanishes this problem becomes the same as the tax compliance problem analyzed in graetz reinganum and wilde 9 this paper extends earlier contributions by analyzing income tax evasion and compliance with a population that is heterogeneous with respect to risk aversion how other parameters of the problem influence optimal audit probabilities as well as the equilibrium proportion of tax evaders will be explored the diversity in preferences over lotteries leads to some interesting comparative static results for example the impact of an increase in the penalty for lying is ambiguous in this model the graphical approach taken here allows us to identify the relevant factors and how they interact additionally this analysis makes it clear why the distribution of risk aversion in the population affects the equilibrium audit probability but not the proportion of tax evaders this problem has been approached in several different ways 1 for example clotfelter 7 slemrod 15 aim and beck 2 and witte and woodbury 16 have studied this phenomenon econometrically but the dearth of reliable data has made empirical analysis difficult other economists most noteworthy alm mcclelland and schulze 5 and alm jackson and mckee 4 have taken a different tack employing the methods of experimental economics while these seminal studies have shed substantial light on taxpayer behavior a leap of faith is required to extrapolate from the laboratory to actual tax compliance decisions the theoretical tax compliance literature originally focused on the behavior of the taxpayer as in allingham and sandmo 1 that is individuals were modeled as expected utility maximizers with exogenously given audit probabilities more recent contributions to the theoretical literature reinganum and wilde 12 13 and graetz reinganum and wilde 9 for example have

tax rate uncertainty factor supplies and welfare uncertainty about prospective changes in tax rates may increase factor supplies and hence the tax base permitting a reduction in tax rates that could result in a net increase in welfare under empirically relevant assumptions about attitudes towards risk we find that when an individual exclusively saves or works the tax base rises in response to greater tax rate uncertainty so that welfare could indeed increase however when an individual both saves and works the supply of the randomly taxed factor declines with increased uncertainty implying that tax revenue and welfare decrease when the nonrandom tax rate is sufficiently low

cheating ourselves the economics of tax evasion no government can announce a tax system and then rely on taxpayers sense of duty to remit what is owed some dutiful people will undoubtedly pay what they owe but many others will not over time the ranks of the dutiful will shrink as they see how they are being taken advantage of by the others thus paying taxes must be made a legal responsibility of citizens with penalties attendant on noncompliance but even in the face of those penalties substantial tax evasion exists and always has the history of taxation is replete with episodes of evasion often notable for their inventiveness during the third century many wealthy romans buried their jewelry or stocks of gold coin to evade the luxury tax and homeowners in eighteenth century england temporarily bricked up their fireplaces to escape notice of the hearth tax collector webber and wildavsky 1986 p 141 this essay reviews what is known about the magnitude nature and determinants of tax evasion with an emphasis on the u s income tax alm 1999 andreoni erard and feinstein 1998 and slemrod and yitzhaki 2002 offer more comprehensive recent reviews of the literature it then places this information into a conceptual and policy context

experimental evidence on the relationship between tax evasion opportunities and labor supply abstract motivated by the observation that access to evasion opportunities is distributed heterogeneously across the labor market this paper examines the extent to which labor supply elasticities with respect to tax rates depend on such evasion opportunities we first discuss the channels through which access to evasion affects labor supply responses and then set up a laboratory experiment n 205 in which all participants undertake a real effort task over several rounds subjects face a tax rate that varies across rounds and are required to pay taxes on earned income the treatment group is given the opportunity to underreport income while the control group is not we find evidence that participants in the treatment group respond differently to changes in the net of tax rate than participants in the control group the effect is more prevalent when tax rates fall additionally the direction of the treatment effect is dependent on the evolution of tax rates across rounds

health capital and cross country variation in income per capita in the mankiw romer weil model abstract this paper examines the effects of incorporating a proxy for health capital in mankiw romer and weil s empirical growth model results suggest a stronger and more robust relationship between income per capita and health capital than between income per capita and educational human capital

gender differences in revealed risk taking evidence from mutual fund investors abstract using data from a national survey of nearly 2000 mutual fund investors we investigate whether investor gender is related to risk taking as revealed in mutual fund investment decisions consonant with the received literature we find that women exhibit less risk taking than men in their most recent largest and riskiest mutual fund investment decisions more importantly we find that the impact of gender on risk taking is significantly weakened when investor knowledge of financial markets and investments is controlled in the regression equation this result suggests that the greater level of risk aversion among women that is frequently documented in the literature can be substantially but not completely explained by knowledge disparities

horizontal equity income taxation and self selection with an application to income tax credits abstract this paper investigates the relationship between utilitarianism and horizontal equity in models of income taxation in particular and self selection in general an example involving well behaved individual preferences is constructed in which a maximization of a utilitarian social welfare function leads via income taxation to horizontal inequities sufficient conditions for utilitarianism to bring horizontal equity are derived the results are applied to the question of whether income tax credits are an appropriate way to treat differences in family size

choice under uncertainty problems solved and unsolved ffifteen years ago the theory of choice under uncertainty could be considered one of the success stories of economic analysis it rested on solid axiomatic foundations it had seen important breakthroughs in the analytics of risk risk aversion and their applications to economic issues and it stood ready to provide the theoretical underpinnings for the newly emerging information revolution in economics 1 today choice under uncertainty is a field in flux the standard theory is being challenged on several grounds from both within and outside economics the nature of these challenges and of our profession s responses to them is the topic of this paper

on the external validity of laboratory tax compliance experiments i introduction laboratory methods are now widely accepted as a methodological approach in economics and increasingly they have been used to examine specific public policy issues there is much to be gained from careful laboratory experiments they offer a low cost means of testing and replicating policy innovations and they generate precise data on individual behavior thereby allowing estimation of behavioral responses importantly they allow many policy innovations to be introduced singly and exogenously in a controlled environment and as a result laboratory experiments are typically seen as having a high degree of internal validity brewer 2000 campbell and stanley 1966 shadish cook and campbell 2002 because the causal relation between variables can be properly demonstrated however as emphasized by plott 1987 using laboratory experiments can allow more general inferences regarding human behavior only when the setting implemented in the laboratory parallels what is observed in the naturally occurring world even beyond this requirement of parallelism is the need for generalizing behavioral observations from the laboratory to the field or external validity internal validity can be demonstrated through the evaluation of the design however external validity can only be verified empirically and only with respect to the specific setting being investigated this paper investigates the external validity of laboratory experiments and does so in the context of experiments on tax compliance behavior tax evasion is central to many important policy questions current estimates report the tax gap or difference between taxes owed and taxes paid in the united states to be 450 billion annually internal revenue service 2012 beyond these massive revenue losses evasion creates major misallocations in resource use when individuals alter their behavior to cheat on their taxes its presence requires that government expend resources to detect noncompliance to measure its magnitude and to penalize tax evasion evasion alters the distribution of income in arbitrary unpredictable and unfair ways and it may contribute to feelings of unjust treatment and disrespect for the law more broadly it is not possible to understand the true impact of taxation without recognizing the existence and the effects of tax evasion laboratory methods have been used to examine a wide range of policies that may affect the compliance decision policies that have not always proven amenable to either theoretical analyses or empirical analyses with field data however laboratory studies of compliance are sometimes viewed with skepticism the most common criticism is that the student subjects typically used in experiments may not be representative of taxpayers undergraduates may have little experience with filing tax returns and their economic and demographic backgrounds may differ from those of taxpayers another criticism is that the context of laboratory compliance experiments does not closely enough resemble the context in which actual compliance decisions are made as a result there is a concern that experimental results on policy innovations that rely upon student subjects in laboratory compliance experiments cannot be generalized to the population it is this issue that we examine here building on previous research we present several types of evidence on the external validity of experiments on individual compliance decisions a first question examines whether behavior of laboratory participants is replicated by behavior of individuals making a similar decision in the naturally occurring world that is do participants in laboratory experiments exhibit different patterns of behavior than individuals in a similar naturally occurring setting to answer this question we utilize a special data set from the u s internal revenue service irs assembled as part of its national research program nrp

global inspection games abstract in the tax evasion game a typical example of inspection game audits are costly and audit probabilities are determined by the tax agency based on the tax returns submitted by taxpayers we find that if taxpayers incomes are correlated e g when they are subject to a common shock the optimal audit probability for low declarations is an increasing function of the average declaration as the latter is an informative signal of the realized level of income since a taxpayer s optimal declaration is an increasing function of the probability of an audit the optimal auditing rule creates incentives for taxpayers to coordinate their declarations the resulting coordination game features multiplicity of equilibria and thus strategic uncertainty about the equilibrium that will be selected when we add a source of fundamental uncertainty about the type of agency taxpayers face the situation can be realistically modeled as a global game further and unlike the coordination game before it yields a unique and usually interior equilibrium which is consistent with empirical evidence and supported by the data collected in a computerized experiment the model can be applied to other inspection games of economic interest such as the regulation of industries and the allocation of welfare benefits among others

searching for ghosts who are the nonfilers and how much tax do they owe this paper is about ghosts individuals who fail to comply with their income tax filing requirements as their name suggests the identities and characteristics of these individuals are shrouded in mystery in this paper we attempt to de mystify the issues surrounding ghosts and examine their role in the compliance process we begin by extending a standard model of tax evasion to account for the existence of ghosts we then examine the empirical significance and policy relevance of our extension using a unique data set containing detailed tax and audit information for both filers and nonfilers of u s federal income tax returns 2001 elsevier science b v all rights reserved

tax compliance and psychic costs behavioral experimental evidence using a physiological marker although paying taxes is a key element of a well functioning society there is still limited understanding as to why people actually pay their taxes models emphasizing that taxpayers make strategic financially motivated compliance decisions seemingly assume an overly restrictive view of human nature law abidance may be more accurately explained by social norms a concept that has gained growing importance as research attempts to understand the tax compliance puzzle this study analyzes the influence of psychic stress generated by the possibility of breaking social norms in the tax compliance context we measure psychic stress using heart rate variability hrv which captures the psychobiological or neural equivalents of psychic stress that may arise from the contemplation of real or imagined actions producing immediate physiologic discomfort the results of our laboratory experiments provide empirical evidence of a positive correlation between psychic stress and tax compliance thus underscoring the importance of moral sentiments for tax compliance we also identify three distinct types of individuals who differ in their levels of psychic stress tax morale and tax compliance

an experimental study of compliance and leverage in auditing and regulatory enforcement evidence suggests that a large majority of firms and individuals comply with regulations and tax laws even though the frequency of inspections and audits is often low moreover fines for noncompliance are also typically low when regulatory violations are discovered these observations are not consistent with static compliance models harrington 1988 modified these static models by specifying a dynamic game in which some agents have an incentive to comply even when the cost of compliance each period is greater than the expected penalty this paper reports a laboratory experiment based on the harrington model framework in which subjects move between two inspection groups that differ in the probability of inspection and severity of fine subjects decide to comply or not in the presence of low medium or high compliance costs enforcement leverage arises in the harrington model from movement between the inspection groups based on previous observed compliance and noncompliance our results indicate that consistent with the model violation rates increase when compliance costs become higher and as the probability of switching groups becomes lower behavior does not change as sharply as the model predicts however since violation rates do not jump from 0 to 1 as parameters vary across critical thresholds a simple model of bounded rationality explains these deviations from optimal behavior

does legality matter the case of tax avoidance and evasion previous research argues that the law expresses social values and could therefore influence individual behavior independently of enforcement and penalization using three laboratory experiments on tax avoidance and evasion we study how legality affects individuals decisions we find that without any risk of negative financial consequences the qualification of tax minimization as illegal versus legal reduces tax minimization considerably legislators can thus in principle affect subjects decisions by defining the line between legality and illegality however once we introduce potential negative financial consequences we observe no difference between legal and illegal tax minimization behavior only if we use moral priming to increase subjects moral cost do we again find a legality effect on tax minimization overall this demonstrates the limitations of the expressive function of the law legality might be an important determinant of behavior only if we consider activities with little or no risk of negative financial consequences or if subjects are morally primed

higher order risk attitudes demographics and financial decisions we conduct an experiment to study the prevalence of the higher order risk attitudes of prudence and temperance in a large demographically representative sample as well as in a sample of undergraduate students participants make pairwise choices between lotteries of the form proposed by eeckhoudt and schlesinger 2006 the choices in these lotteries isolate prudent from imprudent and temperate from intemperate behavior we relate individuals risk aversion prudence and temperance levels to demographics and financial decisions we observe that the majority of individuals decisions are consistent with risk aversion prudence and temperance in both the student and the demographically representative sample an individual s level of prudence is predictive of his wealth saving and borrowing behavior outside of the experiment while temperance predicts the riskiness of portfolio choices our findings suggest that the coefficient of relative prudence for a representative individual is approximately equal to two

optimal observability in a linear income tax abstract we study the optimal observability of the tax base within the standard linear income tax problem where observability is determined by the government s investment into the accurate measurement of the tax base we characterize the optimal level of observability and derive a new expression for the optimal progressivity which in addition to the standard equity efficiency trade off accounts for the limited accuracy of an income tax system

does variability in crimes affect other crimes the case of international corruption and shadow economy abstractusing data on more than 125 countries this article attempts to add to the research linking corruption and the shadow economy by examining the effect of variability uncertainty in one whi

optimal dynamic tax evasion a portfolio approach abstract most tax evasion models are set in a timeless environment though this is not suitable for a study of revenues from financial activities where tax evasion occurs in a dynamic environment this study examines a representative agent aiming to maximize the expected utility from inter temporal consumption and could invest in both riskless and risky assets through tax evasion is possible only in the latter case the investor must pay a fine when his her evasion is detected with a given probability we show that i optimal consumption is higher with tax evasion ii optimal evasion is affected by neither the return nor the volatility of the risky asset iii evasion reduces investment in the risky asset and increases investment in the riskless asset iv evasion can be reduced more efficiently by increasing the fine rather than by increasing the frequency of controls v for a sufficiently high tax rate on the riskless asset the optimal evasion is zero and vi if the fine is proportional to the amount of taxes for only sufficiently low fines the yitzhaki 1974 paradox is confirmed

the excess burden of tax evasion an experimental detection concealment contest abstract tax evasion may cause social welfare losses due to the incentives of taxpayers to invest in the concealment and of tax authorities to invest in the detection of tax evasion reducing the investment of both parties at the same time would then lead to a pareto improvement given that concealment and detection costs are hardly measurable in reality we show in a controlled laboratory experiment that the welfare losses from a concealment detection contest depend positively on the prevailing tax rate but not on the penalty which is imposed in case of detected tax evasion hence policy makers who are concerned about socially inefficient concealment and enforcement costs should focus on tax rates rather than penalty rates

utilitarianism and horizontal equity the case for random taxation this paper establishes that far from being able to derive the principle of horizontal equity from utilitarianism the principle is actually in consistent with utilitarianism in a variety of circumstances we derive conditions under which a it is optimal to impose random tax schedules ex post randomization and b it is optimal to randomize the tax schedules imposed on a set of otherwise identical individuals ex ante randomization the implications for optimal tax theory are discussed more generally it is shown that there are a number of potentially important economic situations with which the principle of horizontal equity may be inconsistent not only with utilitarianism but even with pareto optimality this abstract was borrowed from another version of this item

tax morale affects tax compliance evidence from surveys and an artefactual field experiment our working hypothesis is that cross cultural differences in tax compliance behavior have foundations in the institutions of tax administration and citizen assessment of the quality of governance tax compliance being a complex behavioral issue its investigation requires use of a variety of methods and data sources results from artefactual field experiments conducted in countries with substantially different political histories and records of governance quality demonstrate that observed differences in tax compliance levels persist over alternative levels of enforcement the experimental results are shown to be robust by replicating them for the same countries using survey response measures of tax compliance

tax reporting game under uncertain tax laws and asymmetric information abstract this study models a game played by a tax enforcement agency and a taxpayer who is only partially informed about her true taxable income due to complexity of tax laws a signalling equilibrium is shown to exist in which the taxpayer s report is monotone increasing in her private information about taxable income investigated also is the effect of changes in uncertainty on reporting decisions and the agency s expected revenue

buffer stocks and naive expectations in a non walrasian dynamic macromodel stability cyclicity and chaos in their pioneering work honkapohja ito 1980 constructed a non walrasian macromodel with inventory dynamics some of their assumptions are modified in this paper e g the expected demand for goods is defined by previous rather than actual demand the modified model yields results which are both similar and dissimilar to those of honkapohja and ito for example the keynesian unemployment equilibrium remains invariant but the corresponding stability condition becomes milder the chaotic behavior of the unstable systems is also analyzed

the effects of perceived and actual financial literacy on financial behaviors a combined measure of financial literacy that includes both a test score of actual financial literacy and a self rating of overall financial literacy is used in this study we find that the combined measure appears to provide greater understanding about how financial literacy affects financial behaviors a large national survey of u s adults and households n 28 146 was used to investigate how this overall financial literacy is likely to change financial behaviors across five financial topics credit cards investments loans insurance and financial advice for each topic we include 4 5 financial behaviors 22 in total to demonstrate the consistency of the findings within and across topics although we are unable to identify a causal relationship the results from the probit analysis show that both actual and perceived financial literacy appear to influence financial behaviors and that perceived financial literacy may be as important as actual financial literacy jel d14 g00