Implications of Recent Federal Personal Tax Increase for Evasion, Revenues, and Deficits

Note from the Digital Editor: In order to highlight the high-level of research and scholarship from the authors who have published in the William & Mary Policy Review’s peer-reviewed print journal, we have reproduced the abstracts from Volume 6, Issue 1 along with a link to an electronic copy of the full form of the piece. 

In 2013, the American Taxpayer Relief Act of 2012 and the Patient Protection and Affordable Care Act of 2010 implemented federal personal income tax increases. 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 increased as a direct consequence of the tax-increase policies manifested in these two statutes. To demonstrate this conclusion in the present study, we present evidence concerning key determinants of federal personal income tax evasion that strongly suggests that evasion has been an increasing function of the maximum marginal federal personal income tax rate over the period 1970-2008. This 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 growth in federal tax collections. Among other things, then, this policy-induced increase in personal income tax evasion also implies that federal budget deficits in coming years will be greater than those projected by the Congressional Budget Office (CBO) and various government agencies.

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Dr. Richard J. Cebula is the Walker/Wells Fargo Endowed Chair in Finance at Jacksonville University in Jacksonville, Florida.