AN EMPIRICAL-ANALYSIS OF THE IMPACT OF GOVERNMENT TAX AND AUDITING POLICIES ON THE SIZE OF THE UNDERGROUND ECONOMY - THE CASE OF THE UNITED-STATES, 1973-94

This study empirically examines the impact of federal income tax rates , IRS penalties on unpaid tax liabilities, and audit rates of the Inte rnal Revenue Service on the size of the underground economy in the Uni ted States. Recent data generated by Edgar Feige are used to measure t he size of the underground economy. Based on ordinary least squares es timates, it is found that the maximum marginal personal income tax rat e raises the size of the underground economy. In addition, the size of the underground economy is found to be a decreasing Function of both the percentage of tax returns audited and the penalties imposed by the IRS on unpaid taxes.