The Economics of Tax Compliance: Fact and Fantasy

This paper reviews the current state of theoretical and empirical knowledge regarding compliance with the federal income tax laws. We focus on the validity of certain myths that have come to dominate tax compliance discussions. Toward that end, we discuss three general categories--empirical work, theoretical methodology and fiscal policy recommendations--that seem to require more careful assessment and formulation

The Effect of Tax and Audit Rates on Compliance with the Federal Income Tax, 1977-85

This paper develops a game-theoretic model of the effects of state and federal income tax rates and audit rates on compliance with the federal income tax. Using data drawn primarily from the Annual Reports of the Commissioner of Internal Revenue for the years 1977-85, we find empirical confirmation of the model's prediction that increases in the tax rates increase compliance. We also investigate the overall performance of the federal revenue collection process and find that the entire IRS estimate of the increase in individual noncompliance during 1977-85 is more than accounted for by the decrease in auditing over the same period

A Model of Tax Compliance Under Budget-Constrained Auditors

In the midst of various taxpayer "revolts" and federal budget deficits of unprecedented magnitude, noncompliance with federal and state income tax laws has become an issue of significant policy concern. If the IRS' budget is limited, the probability that any individual taxpayer will be audited depends on the behavior of other taxpayers. Thus the problem of compliance involves a "congestion" effect, which generates strategic interaction among taxpayers as well as between taxpayers and the IRS. This paper reflects an initial attempt to explore how the combination of a strategic IRS and asymmetric information affects the traditional theoretical results on tax compliance behavior

State Income Tax Amnesties 1: Causes

The purpose of this paper is to analyze empirically for the years 1980-88 the factors which led states with state income taxes to run tax amnesty programs. We find a principal factor to be the level of IRS auditing; in particular, we find that states have tended to "free-ride" on the IRS-if the IRS is active in a state, then that state is less likely to run a tax amnesty program. Indeed, our estimates indicate that had the IRS audit rate remained constant during the 1980-88 period (instead of falling by almost one-half) , then the cumulative probability that an average state would have a tax amnesty by 1988 would have fallen by almost one-half compared to its actual level

The Report of the United States to the International Fiscal Association on the Costs of Tax Administration and Compliance

This is a report prepared for the International Fiscal Association on the costs of tax administration and compliance in the United States. At the federal level, we present comprehensive data on administrative costs and review recent estimates of compliance costs. At the state level, we present new data on the administrative costs of state income taxes and general sales taxes, and review the very limited data on state level compliance costs. We also discuss the growing role of tax preparers, including new empirical results of our own. Finally, we review the recently enacted "Taxpayer Bill of Rights.

The Tax Compliance Game: Toward an Interactive Theory of Law Enforcement

The existing paradigm for the economic analysis of tax compliance provides an inadequate theory of the revenue collection process. Even as a purely economic model, its exclusive focus on individual taxpayers' decision-making promotes an unduly restrictive vision of the compliance problem and potential responses to it. In this paper we outline a more comprehensive theoretical basis for analyzing tax compliance, and illustrate it with a simple model. We believe our approach to be a significant improvement in the economic theory of law enforcement because it views the noncompliance problem as an interactive system. In our theoretical construct, individual decision-making not only depends upon and responds to the detection and punishment structure, but, unlike prior models, we also explicitly include the law enforcement agency--in this case the Internal Revenue Service--as an important interactive element. Initially we outline our general approach and its differences from the existing economic law enforcement paradigm. We then detail a simple model and its results and compare these results both to the prior literature and to some of our ongoing research in an effort to illustrate how our theoretical construct may affect predictions. Finally, we describe potential extensions of the model, examine its robustness with respect to various underlying assumptions and offer suggestions for further research, including possible applications to other law enforcement contexts

Thermochemistry of Alane Complexes for Hydrogen Storage: A Theoretical and Experimental Comparison

Knowledge of the relative stabilities of alane (AlH3) complexes with electron donors is essential for identifying hydrogen storage materials for vehicular applications that can be regenerated by off-board methods; however, almost no thermodynamic data are available to make this assessment. To fill this gap, we employed the G4(MP2) method to determine heats of formation, entropies, and Gibbs free energies of formation for thirty-eight alane complexes with NH3-nRn (R = Me, Et; n = 0-3), pyridine, pyrazine, triethylenediamine (TEDA), quinuclidine, OH2-nRn (R = Me, Et; n = 0-2), dioxane, and tetrahydrofuran (THF). Monomer, bis, and selected dimer complex geometries were considered. Using these data, we computed the thermodynamics of the key formation and dehydrogenation reactions that would occur during hydrogen delivery and alane regeneration, from which trends in complex stability were identified. These predictions were tested by synthesizing six amine-alane complexes involving trimethylamine, triethylamine, dimethylethylamine, TEDA, quinuclidine, and hexamine, and obtaining upper limits of delta G for their formation from metallic aluminum. Combining these computational and experimental results, we establish a criterion for complex stability relevant to hydrogen storage that can be used to assess potential ligands prior to attempting synthesis of the alane complex. Based on this, we conclude that only a subset of the tertiary amine complexes considered and none of the ether complexes can be successfully formed by direct reaction with aluminum and regenerated in an alane-based hydrogen storage system.Comment: Accepted by the Journal of Physical Chemistry

State income tax amnesties: Causes

This paper analyzes empirically for the years 1980-1988 the factors that led states with state income taxes to run tax amnesty programs. We find that the potential yield from an amnesty is more important than the fiscal status of a state. Furthermore, we estimate that if the IRS audit rate had remained constant during the 1980-1988 period (instead of falling by almost one half), then the cumulative probability that an average state would have had a tax amnesty by 1988 would have fallen by just over 25 percent

The Effect of Audit Rates on Federal Income Tax Filings and Collections, 1977-1986

This paper analyzes the effects of audit rates and certain other factors on federal income tax filings and collections. Using data drawn primarily from the Annual Reports of the Commissioner of Internal Revenue for the years 1977-1986, we investigate the overall performance of the federal revenue collection process and estimate that total IRS collections in 1986 would have risen by approximately forty billion dollars had the federal audit rate remained constant at its 1977 level during the intervening period