Tax Evasion at the Top of the Income Distribution: Theory and Evidence

80 Pages Posted: 1 Mar 2021

See all articles by John Guyton

John Guyton

Government of the United States of America - Internal Revenue Service (IRS)

Patrick Langetieg

Government of the United States of America - Internal Revenue Service (IRS)

Daniel Reck

London School of Economics & Political Science (LSE)

Max Risch

University of Michigan at Ann Arbor

Gabriel Zucman

University of California, Berkeley - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 2021

Abstract

This paper studies tax evasion at the top of the U.S. income distribution using IRS micro-data from (i) random audits, (ii) targeted enforcement activities, and (iii) operational audits. Drawing on this unique combination of data, we demonstrate empirically that random audits underestimate tax evasion at the top of the income distribution. Specifically, random audits do not capture most tax evasion through offshore accounts and pass-through businesses, both of which are quantitatively important at the top. We provide a theoretical explanation for this phenomenon, and we construct new estimates of the size and distribution of tax noncompliance in the United States. In our model, individuals can adopt a technology that would better conceal evasion at some fixed cost. Risk preferences and relatively high audit rates at the top drive the adoption of such sophisticated evasion technologies by high-income individuals. Consequently, random audits, which do not detect most sophisticated evasion, underestimate top tax evasion. After correcting for this bias, we find that unreported income as a fraction of true income rises from 7% in the bottom 50% to more than 20% in the top 1%, of which 6 percentage points correspond to undetected sophisticated evasion. Accounting for tax evasion increases the top 1% fiscal income share significantly.

JEL Classification: D63, H26

Suggested Citation

Guyton, John and Langetieg, Patrick and Reck, Daniel and Risch, Max and Zucman, Gabriel, Tax Evasion at the Top of the Income Distribution: Theory and Evidence (February 2021). CEPR Discussion Paper No. DP15851, Available at SSRN: https://ssrn.com/abstract=3795247

John Guyton (Contact Author)

Government of the United States of America - Internal Revenue Service (IRS) ( email )

1111 Constitution Avenue, NW
Washington, DC 20224
United States

Patrick Langetieg

Government of the United States of America - Internal Revenue Service (IRS) ( email )

1111 Constitution Avenue, NW
Washington, DC 20224
United States

Daniel Reck

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Max Risch

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

Gabriel Zucman

University of California, Berkeley - Department of Economics ( email )

579 Evans Hall
Berkeley, CA 94709
United States

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