THE EFFECT OF TAX LAWS AND TAX ADMINISTRATION ON TAX COMPLIANCE: THE CASE OF THE U.S. INDIVIDUAL INCOME TAX

Abstract

We develop and estimate an economic model of tax compliance which specifically incorporates important aspects of the U.S. Federal income tax laws (e. g., a progressive tax structure and multiple penalties for tax non-compliance each of which depend on the amount of taxes not paid). On the one hand, our model suggests that increases in the probability of audit and increases in such things as information reporting and tax withholding will be likely to increase compliance. On the other, it suggests that increasing moral ambivalence toward tax compliance will increase non-compliance. Our empirical results, in general, support our theoretical model and indicate that IRS compliance activities, taxpayer opportunities for non-compliance and taxpayer attitudes all have significant effects on compliance. Possibly our most interesting empirical finding is that the decline in audit rates during the 1970s may have accounted for a substantial portion of the decline in compliance during that period.