A Further Inquiry into Factors that Influence Federal Personal Income Tax Evasion in the U.S.

Abstract

This study identifies factors that may have influenced the degree of aggregate federal personal income tax evasion in the U.S. An established tax evasion model is updated to include the most recent data available and augmented with the addition of heretofore neglected or overlooked explanatory variables. To measure the degree of aggregate tax evasion behaviour, we adopt the percentage of personal taxable income that was unreported to the IRS by using official time series data for the years 1980 through 2016. We incorporate previously resilient variables such as the federal tax rate, the unemployment rate, the audit rate of filed returns by IRS personnel, the penalty interest rate on detected tax evasion, and a measure of real income growth into our study. Each has a statistically significant impact on the degree of aggregate federal personal income tax evasion, consistent with prior literature. As an extension of the literature, we find compelling evidence that age, gender, the average effective state income tax rate, and the percentages of federal personal income tax returns that include Schedule C and/or Schedule A are additional variables that have been largely ignored in previous related studies but appear to have impacted tax evasion behaviour.