True positives and false alarms in the detection of tax evasion

The probability of errors in tax returns has not been modeled explicitly before. However, corrections on individual tax returns, made by the fiscal authorities, may be related both to tax evasion and to errors made by the taxpayers. The probabilities of detecting tax evasion (true positives) and errors in tax returns (partly interpreted as false alarms) are specified and parametrized by variables known from the literature. In an empirical survey, the response to a questionnaire has been combined with information from the tax administration regarding tax returns. Taxpayers' willingness and ability to conceal income from the tax authorities are key factors with respect to tax evasion. Furthermore, the model enables the estimation of tax evasion probability, given the level of education and the opportunity to conceal income. The probabilities of tax evasion and errors could be explained to some extent.     

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)     

A RESPECIFIED TAX-ADJUSTED FISHER RELATION

How much will a 1% increase in expected inflation increase nominal interest rates? Irving Fisher's famous equation implies that nominal interest rates will rise in proportion to an increase in expected inflation. Darby and Feldstein, correcting the Fisher equation for taxation, predict a nominal interest rate increase of [1/(1 - T)]% where T is the marginal tax rate: i.e., if T =3, then a 1 % increase in expected inflation should cause a 1.4 % rise in interest rates. Empirical evidence, however, suggests that the rise in interest rates is much smaller than the Darby/Feldstein prediction. Estimates are around 9, varying mostly between 5 and 1.15, which is much closer to Fisher's original prediction. It is important to know the size of the interest rate response to inflation expectations in a world in which inflation and interest rates are volatile and in which tax laws are designed to influence savings and investment through interest rates. In this paper we attempt to close the gap between theorized and estimated effects of inflation by incorporating into the Fisher equation two important aspects of the U.S. tax code: historic cost depreciation and the lower tax rate on capital gains. Our model shows that the effect of expected inflation on interest rates is dampened by the lower benefits from depreciation deductions arid the capital gains tax. Our corrected Fisher equation predicts a 1.12 % nominal interest rate increase, rather than the 1.4 % increase implied by the Darby/Feldstein model. The, our model closes about 56 % of the gap between theory and empirical evidence. The remainder could be closed by additional refinements in the model or better empirical modeling.     

Impacts of Long-Range Increases in the Fuel Economy (CAFE) Standard

This work models the impact of higher CAFE standards on producer and consumer welfare, gasoline consumption, externalities from increased driving, and the emissions of traditional pollutants. In particular, a long-run 3.0 MPG increase in the CAFE standard is estimated to impose welfare losses of about $4 billion per year and save about 5.2 billion gallons of gasoline per year, for a hidden tax of $0.78 per gallon conserved. An 11-cent-per-gallon increase in the gasoline tax would save the same amount of fuel at a welfare cost of about $290 million per year, or about one-fourteenth the cost. (JEL L51 , Q30 )     

DOES THE VAT TAX EXPORTS?

While a VAT should in principle be neutral with respect to international trade, it may in practice function as a tax on exporters' input purchases if firms receive incomplete VAT refunds. Using data for over 100 countries that span the majority of historical VAT adoption episodes, this paper finds that—consistent with this hypothesis—the VAT reduces the exports of an industry with a 10 percentage point higher intermediate goods share of output by over 8% relative to an industry with a lower share. This effect is driven by developing countries and is absent for high-income countries. (JEL F13, F14, H25, H87, O11)     

Monetary Policy Announcements and Stock Returns: Evidence from the Pakistani Market

Objective of this paper is to analyze the impact of monetary policy announcements on stock returns. Event window of 31 days and an estimation window of 250 days was constructed. ARIMA model is applied to calculate the estimated returns from estimation window (t ? 250). Abnormal returns were calculated by taking the difference between actual and estimated returns. Then abnormal returns were aggregated as cumulative abnormal returns (CAR). CAR at 30% showed an impact of monetary policy announcements on stock returns. Null hypothesis of zero abnormal returns was rejected since the results were found in critical region under normal distribution. Further, we decomposed the interest rate into expected and un-expected to analyze their impact on stock returns. After checking for stationarity, Engle–Granger co-integration test were applied to check long run relationship between interest rates and stock return. A significant effect of interest rates (expected and un-expected) was observed in the short run. These results are in line with Kuttner’s (J Monet Econ 47:523–544, 2001), Bernanke and Kuttner’s (J Financ 60:1221–1257, 2005), Bredin et al.’s (US stock returns the impact of domestic monetary policy shocks, http://www.ucd.ie/t4cms/wp0604.pdf, 2007) and Ehrmann and Fratzscher’s (Equal size, equal role? Interest rate interdependence between the Euro Area and the United States, European Central Bank Working Paper 342, 2004). The study finds evidence of LR relationship between un-expected interest rates and whereas expected interest rates and stock returns have short term relationship.     

Uncertainty resolution in tax experiments: Why waiting for an audit increases compliance

Tax compliance in a between-subjects experiment was higher when the uncertainty about the occurrence of an audit was not resolved until three weeks after participants had filed their tax returns than in a control treatment with immediate uncertainty resolution. Results have important implications for experimental tax research where providing immediate feedback whether participants are audited is common practice.     

Misperception of chance and loss repair: On the dynamics of tax compliance

Previous experimental studies on tax behavior have been particularly concerned with determining the absolute effect of detection rate and punishment on tax filing, leading to mixed results. In this paper, we shed some additional light on the effectiveness of audit probability and sanctions by drawing upon a dynamic setting with particular focus on the time lag between audits. Our results showed that tax compliance decreased immediately after a random audit, suggesting that subjects were prone to misperception of chance. Sanctions decreased compliance to a lesser extent; they were, however, associated with the tendency of subjects to repair their losses by increasing their capital stock.     

A revised methodology for estimating total personal giving in the United States,with preliminary estimates for the period 1984–1992

This article describes a revised methodology for estimating the current amount of total personal giving in the United States. The previous methodology is evaluated and it is determined that a different methodology, drawing upon recent enrichments in the data on personal giving, would yield improved historical estimates. This would lead to more reliable extrapolations of the current level of giving. Preliminary historical estimates using the new methodology are made for the period 1984 through 1991. These serve as the base for extrapolations to 1992, and results using several extrapolation formulas are compared.The following changes are included in the historical estimates. Changes in the standard deduction strongly affect the decision to itemise deductions and contributions for a large and varying number of habitual contributors. Accordingly, two groups of contributions itemisers — permanent and transitory — were identified and their contributions separately estimated. The estimate of total giving now reflects the different income and contributions levels of each group. Tax return filers who can be taken as dependents on other persons' tax returns (predominantly children of living parents) are excluded from the group of non-itemiser returns. Tax return data on itemised contributions are adjusted using IRS tax return audit findings. A survey-based estimate of the proportion of non-contributos (zero contributors) is used to provide a more accurate count of the number of individuals and families who habitually make contributions but do not itemise them. An estimate is included of the contributions of the large number of low-income individuals and families not in the tax return data as they are not required to file tax returns.The research reported here has received financial support from the American Association of Fund-Raising Counsel Trust for Philanthropy     

THE IMPACT OF PAYING INTEREST ON RESERVES IN THE PRESENCE OF GOVERNMENT DEFICIT FINANCING

This paper reexamines the impact that paying interest on reserves has on price level indeterminacy, volatility, and economic well‐being. Unlike the previous literature, this model includes an after‐tax deficit financed by assets (bonds and reserves) whose returns are linked. I show that the number of steady‐state equilibria and the corresponding level of indeterminacy are equal to, or greater than, those arising in the no‐interest economy. When the level of indeterminacy is the same, the economic volatility is reduced by paying interest. However, greater indeterminacy in the interest economy results in greater volatility. Finally, paying interest on reserves can enhance welfare. (JEL D6, E3, E5)     

TAX POLICY AND CONSUMER FORESIGHT: A GENERAL EQUILIBRIUM SIMULATION STUDY

This paper presents a dynamic computational general equilibrium model in which expectations regarding future prices can be varied systematically. The model is employed to evaluate how expectations influence the effect of long-run tax policy changes. Under policies (like a consumption tax) that reduce rates of return over time, individuals with perfect foresight save less than individuals with myopic beliefs. This is because consumers with foresight are better able to anticipate the lower returns. Lower saving means that existing distortions due to capital taxes are not offset as much, so that welfare gains are smaller under perfect foresight.     

Dynamics of tax evasion with back auditing,social norm updating,and public goods provision – An agent-based simulation

Income tax evasion dynamics and social interactions are analyzed with an agent-based model in heterogeneous populations. One novelty is the combined analysis of back auditing and ageing, which allows for incorporating psychological findings with respect to social norm updating over a taxpayer’s life cycle. Another novelty concerns individual’s social behavior regarding a Pareto-optimal provision of public goods. Simulation results support the counterintuitive conclusion drawn elsewhere in the literature that income tax compliance may decrease with raising marginal per capita returns (MPCRs). Yet, back auditing seems to have by far the strongest impact on the dynamics of fiscal fraud and also can help to curb the extent of tax evasion (ETE).     

EXPECTED INFLATION AND INTEREST RATES

While there may have been a Darby-Feldstein effect in the 1960's (interest rates rising by more than expected inflation because of tax considerations), the relationship is so variable that it more likely reflects changing investor confidence in the expected returns to capital assets. In addition, the degree of capacity utilization appears to have a strong influence on short-term interest rates, and there is a statistically significant but quantitatively small liquidity effect from changes in the growth rate of money.     

TAX RATES AND LABOR SUPPLY IN FISCAL EQUILIBRIUM

A central tenet of supply-side economics is that a balanced-budget reduction in the marginal tax rate on wage income increases aggregate labor supply. In contrast, the orthodox Keynesian analysis concludes that the relationship between tax rates and the economy-wide supply of labor is theoretically ambiguous. Our analysis of a general model reveals that these two propositions are associated, respectively, with the special assumptions of "compensated independence" and "ordinary independence" between leisure and public spending.     

Income tax evasion dynamics: Evidence from an agent-based econophysics model

We analyze income tax evasion dynamics in a standard model of statistical mechanics, the Ising model of ferromagnetism. However, in contrast to previous research, we use an inhomogeneous multi-dimensional Ising model where the local degrees of freedom (agents) are subject to a specific social temperature and coupled to external fields which govern their social behavior. This new modeling frame allows for analyzing large societies of four different and interacting agent types. As a second novelty, our model may reproduce results from agent-based models that incorporate standard Allingham and Sandmo tax evasion features as well as results from existing two-dimensional Ising based tax evasion models. In this way, such kind of models may become more relevant and useful in economics as well as social psychology. We finally use our model for analyzing income tax evasion dynamics under different enforcement scenarios and point to some policy implications that may also be of interest for psychological research on tax compliance.     

THE EFFECTS OF DIFFERENTIAL MORTALITY RATES ON THE PROGRESSIVITY OF SOCIAL SECURITY

Does the Old-Age and Survivors Insurance portion of Social Security become regressive once we allow for the shorter lifespan of poor people? This paper compares the net returns of poor households to the net returns of other households after taking into account differential longevity. Earnings and Social Security tax and benefit histories are simulated for families of various income levels in the 1925 birth cohort. These tax and benefit profiles are then weighted by the agents' probabilities of survival. For some plausible values of key mortality parameters, differences in mortality eliminate the progressive spread in returns across income categories.     

Distortionary Taxation and Optimal Public Spending on Productive Activities

Using a general‐equilibrium model with endogenous factor supplies, this article investigates the provision of factor‐augmenting public inputs. Such inputs are intermediate goods that affect production functions in a collective manner and give rise to increasing returns. Unlike with collective consumption goods, deviation from the first‐best condition for a public input is inappropriate if taxes are set optimally. When taxes are not optimal, a second‐best rule must include a feedback effect on revenue as well as the deadweight cost of taxes. Implications for benefit‐cost analysis and for interpretation of estimates of the social returns to public capital are explored.     

A preliminary profile of unapprehended undocumented aliens in northern New Jersey: a research note

This article sheds light on a number of questions regarding the sociodemographic structure, economic behavior, and the process of economic insertion of unapprehended undocumented aliens in the Northern New Jersey area. The data, taken from questionnaires of the clientele of the Migration Offices of the Catholic Community Services of the Archdiocese of Newark, allows an in-depth look at the goals and motivations of the family unit and the individual while permitting a glimpse of the structural causes and consequences of international migration. Respondents hold basically secondary labor market service and light industry jobs in which they work diligently without being a burden to the community. Their diligence and effort are rewarded by a respectable showing in household income figures. They also have high participation rates both in paying income taxes and filing income tax returns. Although much of the new undocumented immigration is of relatively recent origin, the respondents plan on a long-term stay. The educational and demographic profiles indicate respondents bring with them substantial amounts of human capital which is a necessary 1st step in assessing whether their overall net contribution to the US is positive or negative.     

Less cheating? The effects of prefilled forms on compliance behavior

As a consequence of digital transformation, individuals are often confronted with prefilled forms or prefilled data entry masks. In situations where cheating and lying are of concern, prefilling might reduce dishonest behavior. In a controlled experiment, we investigate how correctly and incorrectly prefilled forms influence compliance behavior. We frame our experiment as filing the annual income tax return. We show that correct prefilling enhances compliance. However, in cases of incorrect prefilling, we observe asymmetric effects. If prefilled income is lower than true income, we find no positive compliance effect, and compliance is on the same level as with blank forms. If prefilled income is higher than true income, prefilling still has a positive effect on compliance. In that case, compliance is on the same level as with correctly prefilled forms and higher than with blank forms. Our study contributes to the literature on cheating and lying by showing that prefilled forms affect compliance.