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Income Tax Evasion Prior to Withholding

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Part of the Studies in Public Choice book series (SIPC,volume 40)

Abstract

World War II brought with it a substantial increase in federal income tax rates, and introduced income tax withholding for wage income. Rates increased prior to withholding, so an examination of tax payments paid prior to and subsequent to withholding can offer some insight into the degree to which taxes were evaded prior to withholding. The data reveal a substantial increase in number of returns filed, taxable income reported, and income taxes paid due to the implementation of withholding, indicating that a substantial amount of tax evasion prior to withholding was reduced because of withholding. The additional income tax revenue that resulted from withholding undoubtedly had a substantial impact on the increase in the size of the federal government following World War II.

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Fig. 5.1

Notes

  1. 1.

    Prior to 1976 the federal government’s fiscal year ran from July 1 to June 30.

  2. 2.

    Yaniv (1999) also looks at incentives to evade taxes from the standpoint of prospect theory. Yaniv (1998) notes that employees working for multiple employers might be able to evade by misinforming employers about other jobs, which is unlikely to be a factor in the 1940s.

  3. 3.

    Data on inflation taken from the Federal Reserve Bank of Minneapolis website, www.minneapolisfed.org.

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Acknowledgements

The authors gratefully acknowledge helpful comments from Joshua Hall, Carl Kitchens, Phillip Magness, and Russell Sobel.

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Correspondence to Randall G. Holcombe .

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Appendix

Appendix

See Tables 5.5, 5.6, 5.7, 5.8, 5.9, 5.10, 5.11, 5.12, 5.13, 5.14.

Table 5.5 Tax rates of the revenue act of 1941
Table 5.6 Tax rates of the revenue act of 1942
Table 5.7 Tax rates of the revenue act of 1943
Table 5.8 Relevant data from 1943 and 1944, calendar and fiscal years
Table 5.9 Total tax returns filed
Table 5.10 Year-on-year increase
Table 5.11 Total income reported
Table 5.12 Year-on-year increase in income
Table 5.13 Total tax reported
Table 5.14 Year-on-year increase in tax reported

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Holcombe, R.G., Gmeiner, R.J. (2021). Income Tax Evasion Prior to Withholding. In: Hall, J., Khoo, B. (eds) Essays on Government Growth. Studies in Public Choice, vol 40. Springer, Cham. https://doi.org/10.1007/978-3-030-55081-3_5

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