Does a lower (higher) labour force participation rate imply greater (lower) income tax evasion? An exploratory empirical inquiry for the U.S.

ABSTRACT

This exploratory study seeks to add to the income tax evasion literature by investigating a heretofore ignored potential determinant of aggregate federal personal income tax evasion in the U.S., namely, the labour force participation rate. It is hypothesized that the higher (lower) the labour force participation rate, the lower (greater) the degree of tax evasion. The empirical estimation supports this hypothesis, finding that a one unit (one percentage point) increase (decrease) in the labour force participation rate leads to a 9.1% decrease (increase) in income tax evasion. Thus, the declining labour force participation in recent years implies increased tax evasion problems for the U.S.

KEYWORDS:

• Income tax evasion
• labour force participation rate
• income tax rate
• IRS audits

JEL CLASSIFICATION:

• H26
• H24
• E26

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ For the interested reader, a one unit (one percentage point) increase in the income tax rate variable AEPT_t − 1 would be expected to elicit a 2.37% increase in the relative degree of tax evasion. As for the variable AUDIT, taxpayers are discouraged from tax evasion by greater prospects of detection, namely, a one unit (one percentage point) increase in the IRS audit rate would be expected to reduce personal income tax evasion by 10.64%.