Format of Original
National Tax Association
National Tax Journal
The effect of marginal tax rates on income tax evasion is examined using data from the California Tax Amnesty Program, which provided amnesty for people who had not filed returns, had filed inaccurate returns, or were delinquent in paying their tax liabilities. People under criminal investigation were not eligible. After correcting for the selectivity bias, it was found that tax evaders respond to higher marginal tax rates by increasing their evasion activity. The results also confirm the theoretical prediction that people with higher levels of income tend to evade more. The absolute and relative sizes of income and tax rate changes depend on the scope of the evasion measure used. In particular, the absolute effects of income and tax rate changes are larger for the income-based measures of evasion, while the relative effects are larger for the tax-based measure of evasion. Finally, the results suggest that evasion generally is inelastic with respect to changes in both true income and marginal tax rates but that tax rate inelasticities are consistently larger than income elasticities.
Crane, Steven E. and Nourzad, Farrokh, "Tax Rates and Tax Evasion: Evidence from California Amnesty Data" (1990). Economics Faculty Research and Publications. 479.