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)| false O’Neill, David M., “Growth of the Underground Economy, 1950–81: Some Evidence from the Current Population Survey,” A Study Prepared for the Use of the Joint Economic Committee, Congress of the United States( Washington: Government Printing Office, December 9, 1983).
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United States, Internal Revenue Service (1979), Estimates of Income Unreported on Individual Income Tax Returns, Publication No. 1104(9-79), Department of the Treasury (Washington: Government Printing Office, Department of the Treasury, September 1979).
Mr. Tanzi is Director of the Fiscal Affairs Department. He holds a Ph.D. from Harvard University. His writings have been in the areas of public finance, monetary economics, and macroeconomics.
He defines unreported income as “the difference between the amount of income that ought to be reported to the tax authority under full compliance with the tax code and the amount actually reported” (p. 1). This is the same definition of unreported income used by the U.S. Internal Revenue Service. However, the IRS has often gone to great length to explain that unreported income and income earned in the underground economy are two very different things (see Cox, 1984).
In recent years only a fraction of interest received has been reported to the tax authorities by those who receive these incomes.
As Dennis Cox of the Internal Revenue Service has written: “it is important to emphasize that the tax gap relates to a large variety of errors and misrepresentations, including overstatements of personal and business deductions, personal exemptions and statutory adjustments as well as understatement of income” (see Cox, p. 283). For 1981, the IRS estimated this “tax gap” at $81.5 billion. This is the value used by Feige in Figure 4, But, as I shall explain later, the tax loss associated with unreported incomes is somewhat smaller than the total tax gap ($52.2 billion versus $81.5 billion). Thus, Feige is inconsistent with his own definition.
Of course, this is true for the historical period covered by Feige. In recent years, owing to financial deregulation, some checkable deposits have been earning interest.
The most convincing of these readers was the late William H. White.
See also Tanzi (1980, pp. 434–35).
Remember that the estimate of median income is made by the national accounts authorities and not by the Internal Revenue Service. Feige’s “unreported income” is unreported to the tax authorities.
This excludes, as it should, tax evasion associated with overstated deductions. As I have mentioned earlier, Feige reports the full tax gap in his Figure 4 while he should report only the federal income revenue loss due to unreported income. The IRS has estimated that the tax gap of $52.2 billion was associated with an unreported income of $133.8 billion. To this income unreported by filers, one must add another $29.8 billion unreported by nonfilers. The tax due on this latter income was estimated by the IRS to be only $4.7 billion, as these nonfilers were often individuals with low wages who had already paid some taxes through withholding by their employers.