The taxpayer resentment and 'neo ultra-rationality' hypotheses

Abstract

This study empirically investigates two hypotheses, the taxpayer resentment hypothesis and the neo ultra-rationality hypothesis, both of which argue that higher federal budget deficits induce an increase in the degree of aggregate federal personal income tax evasion. Using annual data on two alternative measures of aggregate federal personal income tax evasion for two periods, 1960-2002 and 1960-1997, and allowing for such factors as federal income tax rates, IRS tax return audit rates, and a variable measuring the public's general dissatisfaction with government, it is found that income tax evasion is an increasing function of the budget deficit. Important policy implications of this finding are provided in the concluding section of the study.