SUMMARY
Estimated Future Tax Evasion under the Income Tax System and Prospects for Tax
Evasion under the FairTax: New Perspectives
By
Richard J. Cebula, Ph.D.
Fiorentina Angjellari-Dajci, Ph.D.
March 1, 2017
Purpose of Study
1. The Evasion study examines tax evasion, looking at historical rates of evasion and
then estimating future tax evasion over the next decade, 2017 to 2026.
a) The authors focus on the underreporting of income. They compare total personal
income as derived by the U.S. Bureau of Economic Analysis and contained in the
National Income Product Accounts (NIPA)1 to total income reported to the IRS
contained in the Statistics of Income data: BEA-derived Adjusted Gross Income
to IRS Adjusted Gross Income. Historically, the underreporting of income had a
low of 8.4% in 1967 and reached a high of 14.8% in 2005. (The last year BEA
conducted the study).
Figure 1. BEA Derived AGI Gap Percentage of Total AGI,
1950-2005
16
14.8
14
12
10
8
8.4
6
4
2
0
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
b) The authors next step is to forecast income tax evasion in the form income
underreporting – the AGI Gap. They use three different growth rates: evasion
growing at the rate of inflation (2.703%), evasion growing at the rate of the
nominal GDP growth rate (4.85%), and evasion growing at the historical evasion
growth rate of (7.034%).
1
NIPA is the same data that is used to estimate taxable consumption under the FairTax.
1
2010
Table 4 shows that the total AGI Gap (income underreported to the IRS) over the
next decade is $32.730.3 trillion for 2017-2026. This amount is 77.4%-81.4% larger than
the size of US GDP in 2015-2016 ($18.04 - $18.45 trillion in current dollars).
Table 4. New Estimates of the AGI Gap in Current Dollars Using
Alternative Actual Annual Percentage Growth Rates (% GRs),
2017-2026
Inflation
NGDP GR
AGI Gap GR
Tax Year
(2.703%)
(4.850%)
(7.034%)
2017
1,622.10
1,901.80
2,365.10
2018
1,665.90
1,994.00
2,531.50
2019
1,711.00
2,090.70
2,709.60
2020
1,757.20
2,192.10
2,900.20
2021
1,804.70
2,298.40
3,104.20
2022
1,853.50
2,409.90
3,322.50
2023
1,903.60
2,526.80
3,556.20
2024
1,955.10
2,649.30
3,806.30
2025
2,007.90
2,777.80
4,074.10
2026
2,062.20
2,912.50
4,360.70
$18,343.30
$23,753.40
2017 to 2026
$32,730.30
Sources: BLS, BEA and BEA’s Ledbetter (2004; 2007)
Table 5.1 shows the lost income tax revenues, Income Tax Gap, which is calculated by
multiplying the projected underreported income in Table 4 times 20.66%, the average federal
income tax rate. Table graphed in Figure 3.
Table 5.1 Estimated Income Tax Gap, 2017-2026, Billions of Current
Dollars, Federal Income Tax Rate of 20.66%*
(1)
(2)
(3)
Inflation
NGDP GR
AGI Gap GR
Tax Year
(2.703%)
(4.850%)
(7.034%)
2017
335.1
392.9
488.6
2018
344.2
412.0
523.0
2019
353.5
431.9
559.8
2020
363.0
452.9
599.2
2021
372.9
474.9
641.3
2022
382.9
497.9
686.4
2023
393.3
522.0
734.7
2024
403.9
547.4
786.4
2025
414.8
573.9
841.7
2026
426.0
601.7
900.9
$4,907.4
$6,762.1
2017 to 2026
$3,789.7
*Sources: Table 9; IRS (1996, p. 9; 2016, p. 2)
The anticipated Individual Income Tax Gap to be faced by the IRS falls in the range of
between 3.8 trillion and nearly 6.8 trillion dollars.
2
Figure 3. Estimated Income Tax Gap, 2017-2026
(Billions of Current Dollars)
1,000
800
600
523
489
786
842
901
335
344
353
574 602
547
522
498
475
453
426
415
404
393
383
373
363
2017
2018
2019
2020
400
432
412
393
200
686
641
599
560
735
2016
2021
2022
Inflation (2.703%)
2023
2024
2025
2026
2027
Nominal GDP Growth Rate (4.850%)
AGI Gap Growth Rate (7.034%)
c) The authors compare the forecasted income tax evasion to total income tax
revenues, again using the three different growth rates. On average, the annual
share varies from 16.2% to 34.2% for the time period from 2017-2026. Individual
Income Tax evasion from 2017 to 2026 will persist above the 16% level. Based
on historic growth rates (which is the more likely to occur scenario), income
tax evasion will grow from 29.3% of income tax revenues in 2017 to 34.2%
by 2026– exceeding one third of income tax revenues.
Figure 4. Individual Income Tax Evasion as a Share of Projected
Individual Income Tax Revenues, 2017-2026
40.0
35.0
P
e
r
c
e
n
t
31.0
31.6
32.3
32.9
33.5
34.2
22.9
22.8
29.3
29.4
29.8
30.4
23.6
23.1
23.0
23.0
22.9
22.9
22.9
20.1
19.3
18.8
18.4
18.0
17.6
17.3
16.9
16.5
16.2
2020
2021
2022
2023
2024
2025
2026
30.0
25.0
22.9
20.0
15.0
10.0
5.0
2016
2017
2018
2019
Inflation (2.703%)
2027
Nominal GDP Growth Rate (4.850%)
AGI Gap Growth Rate (7.034%)
d) The next step is to look at the history and generate a forecast of what is generally
known as the IRS Tax Gap – this is the taxes owed but not paid timely. It consists
of nonfiling, underreporting, and underpayment. It includes all federal taxes:
individual and business income taxes, payroll taxes, capital gains taxes, estate
taxes and excise taxes.
3
Total tax evasion (all federal taxes) will increase from year to year and based on
historic trends will increase from an estimated 20.2% in 2017 to 23.6% in 2026 of
gross tax revenues by 2026.
Based on historical trends, cumulative tax evasion from the federal income
tax system over the next decade (2017-2026) will reach about 9 trillion
dollars.
Figure 5. Estimated Gross Tax Gap, 2017-2026
(Billions of Current Dollars)
1,400
1,200
1,000
877
931
987
1,179
1,111
1,047
977
780 827
889 932
735
848
653 693
809
615
735 771
580
701
547
683 702
638 669
486 515
614 631 648 665
598
582
510 523 537 552 567
470 483 496
800
600
400
200
2010
2012
2014
2016
2018
2020
Inflation (2.703%)
2022
2024
2026
2028
GDP Growth Rate (4.850%)
Historical Gross Tax Gap GR (6.087%)
e) As with the income tax gap, the Total Tax Gap as a % of Total Taxes is
computed. Based on historic trends, the Total Tax Gap, on average, as a percent
of total tax revenue, will increase from year to year starting at 20.2% and reaching
23.6% by 2026.
Figure 6. Gross Tax Evasion Share of Projected Gross Tax
Revenues
30.0
P
e
r
c
e
n
t
25.0
20.2
20.0
20.4
20.8
21.2
21.7
22.1
22.5
22.9
23.3 23.6
18.6 18.6 18.7 18.9 19.1 19.2 19.3 19.4 19.5 19.6
16.1 15.7 15.5 15.3 15.2 15.0 14.8 14.5
14.3 14.1
15.0
10.0
5.0
2016
2018
2020
2022
2024
Inflation (2.703%)
GDP Growth Rate (4.850%)
Historical Gross Tax Gap Growth Rate (6.087%)
4
2026
2028
f) The authors compute the amount of tax burden that is effectively shifted from the
tax scofflaws to those who pay their taxes. This is done by dividing the Total Tax
Gap by the number of households for that year. The yearly population forecast
was divided by 2.53 (the average persons per household) to get the number of
households.
Based on the historical growth of the gross tax gap, the average tax burden
shifted per household grows from $5,365 in 2017 to $8,526 in 2026. This
“surtax” enables the federal government to raise the same level of revenue it
would collect if all taxpayers were to report their income and pay their taxes in
full.
Figure 7. Annual Average Tax Burden Shifted to U.S
Households Due To Tax Evasion (Current Dollars)
10,000
9,000
8,000
7,000
6,000
5,365
5,000
5,646
4,942
5,140
6,584
6,932
5,347 5,563 5,787
7,298
6,022 6,266
8,526
8,094
7,067
6,522 6,788
4,439
4,523
4,609
4,698
4,789
4,882
5,075
4,356
4,977
4,276
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
4,000
3,000
5,942
6,255
7,685
2,000
1,000
2016
Inflation (2.703%)
Historical Gross Tax Gap (6.087%)
2027
GDP Growth Rate (4.85%)
The cumulative tax burden shifted from tax scofflaws to compliant taxpayers
amounts to a total estimated burden of between $46,623 and $68,328 over the tenyear period from 2017-2026, which is comparable in size, if not greater, under the
historical growth rate scenario, to both the median and mean household income in
the U.S. in 2015.
In other words, in one out of the 10 years ahead each American household will be
working solely to pay off the 10-year overall “surtax”—arguably a heavy burden
for every household.
2. The study looks at various trends in the economy and whether they would tend to
increase or decrease tax evasion.
3. Model of transactions costs associated with the decision to evade the FairTax: time
and energy, a conscience cost (knowing that you are doing wrong), potential cost of
penalties if caught, and the cost of finding someone to collude with you and agree not
to collect or pay the tax.
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4. Practical considerations of the FairTax reducing evasion: 80% reduction in number
of tax filers, and the dominance of large companies in the wholesale and retail
sectors.
Table 13 shows that while small businesses make up 64.7% of wholesale and retail trade
corporations, their combined business receipts represent only 2.1% of total wholesale and
retail trade business receipts.
Table 13. Distribution of Wholesale and Retail Trade Corporations by Size of
Business Receipts, 2012
Size of Business Receipts
Total
Returns
Business
Receipts
Percent of
Returns
Percent of
Receipts
(Money amounts thousands of dollars and size of business receipts is in whole dollars)
Under $25,000
147,400
$784,540
15.40%
0.00%
$25,000 to $100,000
106,865
$6,104,331
11.10%
0.10%
$100,000 to $250,000
145,023
$24,100,652
15.10%
0.30%
$250,000 to $500,000
126,027
$45,284,628
13.10%
0.60%
$500,000 to $1,000,000
121,775
$86,165,220
12.70%
1.10%
Small Business Subtotal
647,090
162,439,371
$1,000,000 to $2,500,000
137,559
$219,076,744
14.30%
2.80%
$2,500,000 to $5,000,000
73,809
$259,165,989
7.70%
3.30%
$5,000,000 to $10,000,000
42,293
$297,656,068
4.40%
3.80%
$10,000,000 to $50,000,000
45,979
$954,027,758
4.80%
12.20%
$50,000,000 to $100,000,000
7,111
$497,301,653
0.70%
6.40%
$100,000,000 to $250,000,000
3,741
$557,800,877
0.40%
7.10%
$250,000,000 or more
2,167
$4,862,482,246
0.20%
62.30%
Total Active Corporations
959,749
7,809,950,706
67.40%
100.00%
2.10%
100.00%
Source: Calculations based on IRS, RETURNS OF ACTIVE CORPORATIONS, Table 5--Selected
Balance Sheet, Income Statement and Tax Items, by Sector, by Size of Business, Tax Year
2012. All figures are estimates based on samples.
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