Federal aggregate personal income tax evasion/unreported income and its real interest rate yield effects on longer-term treasury debt issues

Abstract

Purpose The purpose of this study is to empirically investigate the impact of aggregate federal personal income tax evasion on the real interest rate yield on 10-year Treasury notes, 20-year Treasury bonds and 30-year US Treasury bonds. Design/methodology/approach An open-economy loanable funds model is developed, with income tax evasion expressly included in the specification in the form of the AGI (adjusted gross income) gap and the ratio of unreported AGI to actual AGI, expressed as a per cent. Findings The empirical estimations reveal compelling evidence that income tax evasion thus measured acts to elevate the real interest rate yields on 10-year Treasury notes and both 20-year and 30-year Treasury bonds, raising the possibility of a tax evasion-induced form of “crowding out”. Research limitations/implications Ideally, tax evasion data for a longer time period would be very useful. Practical implications To the extent that greater federal personal income tax evasion yields a higher interest rate yield on 10-year, 20-year and 30-year Treasury debt issues, it is likely that the tax evasion will also elevate other interest rates in the economy. Social implications Higher interest rates resulting from tax evasion would likely slow-down macroeconomic growth and accelerate unemployment. Originality/value Neither the tax evasion literature nor the interest rate literature has ever considered the impact of tax evasion behavior on long-term interest rates.