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Implications of Recent Federal Personal Income Tax Increases for Income Tax Evasion, Tax Revenues, and Budget Deficits

Cebula, Richard and Boylan, Robert and Foley, Maggie and Isard, Douglass (2014): Implications of Recent Federal Personal Income Tax Increases for Income Tax Evasion, Tax Revenues, and Budget Deficits.

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Abstract

In 2013, federal personal income tax increases were implemented in the U.S. under provisions of two federal statutes: the American Taxpayer Relief Act of 2012 and the Patient Protection and Affordable Care Act of 2010. Based on our analysis of data for the time period 1970-2008, we argue that the incentives to engage in federal personal income tax evasion have been increased as a direct consequence of the public tax-increase policies manifested in these two statutes. To demonstrate this conclusion in the present study, we first present evidence that strongly suggests that personal income tax evasion has been an increasing function of the maximum marginal federal personal income tax rate over the period 1970-2008, which constitutes the most current data currently available on aggregate personal income tax evasion. This evidence leads us then to conclude that the federal personal income tax increases implemented effectively in 2013 under provisions of the two aforementioned statutes will result in increased tax evasion behavior and hence lower tax collections. Among other things, then, this public-policy-induced increase in personal income tax evasion also implies that the federal budget deficits in coming years will be greater than projected by the CBO and various government agencies. We also find that, among other things, federal personal income tax evasion has been an increasing function of the unemployment rate. Thus, among other things, there is also evidence that continued high unemployment rates may increase tax evasion and hence the size of federal budget deficits.

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