Abstract
How much tax revenue is lost due to noncompliance? The IRS and other researchers attempt to answer this question by estimating the difference between taxes owed and those actually paid. The result is known as the tax gap.
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Notes
- 1.
GAO Report, Testimony of Michael Brostek, Director Strategic Issues, Before the Subcommittee on Federal Financial Management, Government Information, and International Security, Committee on Homeland Security and Governmental Affairs, U.S. Senate, October 2005, “Tax Gap: Multiple Strategies, Better Compliance Data, and Long−Term Goals Are Needed to Improve Taxpayer Compliance”.
- 2.
Tax payments are sometimes made late, potentially many years after the taxes were owed. To account for this, I use the term gross tax gap for the total amount of money that was not paid in a timely manner, and net tax gap for the final annual disparity between taxes owed and those paid after late payments are tallied. The generic term “tax gap” usually refers to the gross tax gap.
- 3.
More recent estimates of the gross tax gap are not available.
- 4.
“Federal Tax Compliance Research: Individual Income Tax Gap Estimates for 1985, 1988, and 1992.” IRS Publication 1415 (Rev. 4−96).
- 5.
The methodology is analogous to adjusting for nonresponse in survey sampling.
- 6.
The probit model is a maximum likelihood probability model wherein probabilities are determined using the cumulative normal distribution.
- 7.
This information is based on prior returns filed.
- 8.
These location probability weights are further adjusted based on whether each individual filed a married joint return, under the assumption that the returns for these individuals are twice as easy to locate.
- 9.
For further detail see IRS Publication 1415 (rev. 4–96).
- 10.
IRP documents include wage and income statements collected by the IRS from employers, banks, and other institutions that provide individuals with income.
- 11.
Several income items, such as tip and informal income, use different multipliers based on surveys or other data. For a discussion of these items, see IRS Publication 1415 (Rev 4–96), and Ho and Wong (1994).
- 12.
This methodology is referred to as model assisted survey sampling in the sampling literature. For further details on the statistical matching procedure, see Ho and Wong (1995).
- 13.
Marginal tax ratios are calculated for specific line items by recomputing total taxes due on the individual’s tax returns after income adjustments are made.
- 14.
This model was developed by Jonathan Feinstein. See Feinstein (1990).
- 15.
Ibid.
- 16.
GAO, “Multiple Strategies, Better Compliance Data, and Long-Term Goals Are Needed to Improve Taxpayer Compliance,” GAO-06-453T (Washington, D.C.: February 15, 2006).
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Dubin, J.A. (2012). The Tax Gap. In: The Causes and Consequences of Income Tax Noncompliance. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-0907-7_2
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