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America?s Underground Economy: Measuring The Size, Growth And Determinants Of Income Tax Evasion In The U.S

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Executive Summary

This paper empirically investigates the extent of non compliance with the tax code and the determinants of federal income tax evasion in the U.S. Employing the most recent data the authors find that 18-19% of total reportable income is not properly reported to the IRS, giving rise to a "Tax gap" approaching $500 billion dollars. Three time periods are studied, 1960-2008, 1970-2008, and 1980- 2008. It is found across study periods that income tax evasion is an increasing function of the average effective federal income tax rate, the unemployment rate, public dissatisfaction with government, and per capita real GDP (adopted as a measure of income), and a decreasing function of the Tax Reform Act of 1986 (during its first two years of being implemented).

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