This article reviews the last few decades of research on tax evasion, focusing on the contributions of Joel Slemrod. Slemrod's work greatly expanded the economists' toolkit for studying tax evasion, including the implementation of field experiments in collaboration with tax authorities, forensic approaches to detecting the traces of tax evasion in observational data, and the use of administrative data to evaluate enforcement policies. Employing these empirical tools deepened our theoretical understanding of tax evasion beyond simple deterrence theory, incorporating more realistic information structures, behavioral and social motivations, and administrative frictions.

Traditional optimal commodity tax analysis, dating back to Ramsey (1927), prescribes that to maximize welfare one should impose higher taxes on goods with lower demand elasticities. Yet policy makers do not stress minimizing efficiency costs as a desideratum. In this note we revisit the commodity tax problem, and show that the attractiveness of the Ramsey inverse-elasticity prescription can itself be inverted if the tax system is chosen-or at least strongly influenced-by taxpayers who are overly confident of their ability, relative to others, to substitute away from taxed goods.

This paper analyzes consumption to evaluate the distributional effects of pension reforms. Using Swedish administrative data, we show that on average, workers who retire earlier consume less while retired and experience larger drops in consumption around retirement. Interpreted via a theoretical model, these findings imply that reforms incentivizing later retirement incur a substantial consumption smoothing cost. Turning to other features of pension policy, we find that reforms that redistribute based on early-career labor supply would have opposite-signed redistributive effects, while differentiating on wealth may help to target pension benefits toward those who are vulnerable to larger drops in consumption around retirement. (JEL E21, G51, H23, H55, J22, J26)

Empirical evidence suggests individuals often evaluate options relative to a reference point, especially seeking to avoid losses. We analyze welfare under reference dependence. We describe how welfare effects of policies depend on normative judgments about whether reference dependence reflects a bias or normative preference. Lowering reference points generally improves welfare, absent countervailing externalities or biases. Conversely, welfare effects of price changes depend strongly on normative judgments. We apply our theory to reference dependence exhibited in German workers’ retirement decisions. Our results suggest positive welfare effects of increasing the Normal Retirement Age but ambiguous effects of financial incentives to postpone retirement. ∗d.h.reck@lse.ac.uk and seibold@uni-mannheim.de. We are thankful for helpful discussions and comments from Jack Fisher, Jacob Goldin, Xavier Jaravel, Camille Landais, Alex Rees-Jones, Emilie Sartre, Johannes Spinnewijn, Charlie Sprenger, Neil Thakral, Dmitry Taubinsky, Teju Velayudhan, and numerous seminar and conference participants. Felix Knau, Canishk Naik and Baptiste Roux provided excellent research assistance. Daniel Reck gratefully acknowledges financial support from the Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) at the London School of Economics. Arthur Seibold gratefully acknowledges financial support from the Daimler & Benz Foundation. “Blessed is he who expects nothing, for he shall never be disappointed.” Alexander Pope

This paper uses account-level information, reported to the IRS by foreign financial institutions under the Foreign Account Tax Compliance Act (FATCA), to produce new evidence on the foreign financial wealth of U.S. households. We find that U.S. taxpayers hold around $4 trillion in foreign accounts, almost half in jurisdictions usually considered tax havens. Combining the FATCA reports with other administrative tax data and tracing account ownership through partnerships, we document a steep income gradient in the propensity to hold assets in foreign financial institutions. Specifically, more than 60% of the individuals in the top 0.01% of the income distribution own foreign accounts, the vast majority in tax havens and more than half through a partnership. We discuss the likely implications of these findings for the overall impact of FATCA on tax compliance and government revenue.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Default effects are pervasive, but the reason they arise is often unclear. We study optimal policy when the planner does not know whether an observed default effect reflects a welfare-relevant preference or a mistake. Within a broad class of models, we find that determining optimal policy is impossible without resolving this ambiguity. Depending on the resolution, optimal policy tends in opposite directions: either minimizing the number of nondefault choices or inducing active choice. We show how these considerations depend on whether active choosers make mistakes when selecting among nondefault options. We illustrate our results using data on pension contribution defaults.

Using United States tax return data containing the universe of individual taxable stock sales from 2008 to 2009, we examine which individuals increased their sale of stocks following episodes of market tumult. We find that the increase was disproportionately concentrated among investors in the top 1% and top 0.1% of the overall income distribution, retired individuals and individuals at the very top of the dividend income distribution. Our estimates suggest that, following the day when Lehman Brothers collapsed, taxpayers in the top 0.1% sold $1.7 billion more in stocks than individuals in the bottom 75%. This difference is equal to 89% of average daily sales by taxpayers in the top 0.1%.

This paper reviews recent research on tax evasion by high-income, high-wealth individuals and attempts to draw out some lessons for policymaking. We review the key concepts around tax evasion, and we summarize the key insights from economic studies of tax evasion in the full population. We contrast the understanding of tax evasion that emerges from such prior work with the findings of recent studies on high-income, high-wealth taxpayers specifically, which highlights the relative sophistication of the evasive strategies favoured by wealthy taxpayers. Finally, we characterize the key steps in the tax enforcement process as they pertain to the high-wealth population, and describe how these steps have played out in specific areas like the fight against offshore tax evasion (JEL H24, H26, K34).

We conduct the first-ever study of actual searches done in a public tax disclosure system, analyzing about one million searches done in 2014 and 2015 in Norway. We characterize the social network these searches comprise, including its degree of homophily and reciprocation, and the demographics of targets and searchers. About one-fourth of searches occur within identifiable household and employment networks. Most searchers target people similar to themselves—homophily in network parlance—but young, low-income searchers also target older, successful people and celebrities. A causal research design based on the timing of searches relative to tax filing uncovers no evidence that, upon discovering they were targeted, targets subsequently increase their reported income. The evidence suggests that social comparisons motivate the bulk of searches rather than tax compliance. However, public disclosure may deter evasion even when compliance-motivated searches are rare in equilibrium.

This paper studies tax evasion at the top of the U.S. income distribution using IRS micro-data from (i) random audits, (ii) targeted enforcement activities, and (iii) operational audits.Drawing on this unique combination of data, we demonstrate empirically that random audits underestimate tax evasion at the top of the income distribution.Specifically, random audits do not capture most tax evasion through offshore accounts and pass-through businesses, both of which are quantitatively important at the top.We provide a theoretical explanation for this phenomenon, and we construct new estimates of the size and distribution of tax noncompliance in the United States.In our model, individuals can adopt a technology that would better conceal evasion at some fixed cost.Risk preferences and relatively high audit rates at the top drive the adoption of such sophisticated evasion technologies by high-income individuals.Consequently, random audits, which do not detect most sophisticated evasion, underestimate top tax evasion.After correcting for this bias, we find that unreported income as a fraction of true income rises from 7% in the bottom 50% to more than 20% in the top 1%, of which 6 percentage points correspond to undetected sophisticated evasion.Accounting for tax evasion increases the top 1% fiscal income share significantly.

In 2008, the IRS initiated efforts to curb the use of offshore accounts to evade taxes. This paper uses administrative microdata to examine the impact of enforcement efforts on taxpayers’ reporting of offshore accounts and income. We find that enforcement caused approximately 50,000 individuals to disclose offshore accounts with a combined value of about $100 billion. Most disclosures happened outside offshore voluntary disclosure programs by individuals who never admitted prior noncompliance. Disclosed accounts were concentrated in countries often characterized as tax havens. Enforcement-driven disclosures increased annual reported capital income by $2–$4 billion, corresponding to $0.6–$1.2 billion in additional tax revenue. (JEL H24, H26, K34)

In many settings, decision makers’ behavior is observed to vary on the basis of seemingly arbitrary factors. Such framing effects cast doubt on the welfare conclusions drawn from revealed-preference analysis. We relax the assumptions underlying that approach to accommodate settings in which framing effects are present. Plausible restrictions of varying strength permit either partial or point identification of preferences for the decision makers who choose consistently across frames. Recovering population preferences requires understanding the empirical relationship between decision makers’ preferences and their sensitivity to the frame. We develop tools for studying this relationship and illustrate them with data on automatic enrollment into pension plans.

This paper studies tax evasion at the top of the U.S. income distribution using IRS micro-data from (i) random audits, (ii) targeted enforcement activities, and (iii) operational audits. Drawing on this unique combination of data, we demonstrate empirically that random audits underestimate tax evasion at the top of the income distribution. Specifically, random audits do not capture most tax evasion through offshore accounts and pass-through businesses, both of which are quantitatively important at the top. We provide a theoretical explanation for this phenomenon, and we construct new estimates of the size and distribution of tax noncompliance in the United States. In our model, individuals can adopt a technology that would better conceal evasion at some fixed cost. Risk preferences and relatively high audit rates at the top drive the adoption of such sophisticated evasion technologies by high-income individuals. Consequently, random audits, which do not detect most sophisticated evasion, underestimate top tax evasion. After correcting for this bias, we find that unreported income as a fraction of true income rises from 7% in the bottom 50% to more than 20% in the top 1%, of which 6 percentage points correspond to undetected sophisticated evasion. Accounting for tax evasion increases the top 1% fiscal income share significantly. John Guyton Internal Revenue Service Research, Applied Analytics, and Statistics 77 K Street, NE Washington, DC 20002 john.guyton@irs.gov Patrick Langetieg Internal Revenue Service Research, Applied Analytics, and Statistics 77 K Street, NE Washington, DC 20002 Patrick.T.Langetieg@irs.gov Daniel Reck London School of Economics Department of Economics Houghton Street London WC2A 2AE United Kingdom d.h.reck@lse.ac.uk Max Risch Tepper School of Business Carnegie Mellon University 4765 Forbes Ave. Pittsburgh, PA 15213 United States mwrisch@andrew.cmu.edu Gabriel Zucman Department of Economics University of California, Berkeley 530 Evans Hall, #3880 Berkeley, CA 94720 and NBER zucman@berkeley.edu

We estimate the impact of youth minimum wages on youth employment by exploiting a large discontinuity in Danish minimum wage rules at age 18, using monthly payroll records for the Danish population. The hourly wage jumps by 40% at the discontinuity. Employment falls by 33%, and total input of hours decreases by 45%, leaving the aggregate wage payment almost unchanged. We show theoretically how the discontinuity may be exploited to evaluate policy changes. The relevant elasticity for evaluating the effect on youth employment of changes in their minimum wage is in the range 0.6 to 1.1.