Are Estimated Tax Elasticities Really Just Tax Evasion Elasticities? The Case of Charitable Contributions
Tax return data, which has been a principal source for econometric investigations of the behavioral response to tax policy, is subject to misreporting that may bias estimates of tax responsiveness. The misreporting arises because understatement of taxable income may itself be a function of an individuals marginal tax rate, it being the return to a dollar of understated taxable income. To the extent that misreporting of income and deductions is a function of the same factors that determine the behavior under study, estimated relationships based on reported data will reveal a composite of the tax (and income) responsiveness of the actual behavior and of the misreporting of the behavior. This paper used data from tax returns that have been subject to intensive audits to confront the quantitative importance of misreporting for the estimated tax responsiveness of charitable contributions. This has been the subject of numerous empirical studies using tax return data which use a common empirical framework. It concludes that the tax responsiveness of charitable giving that has been detected using tax return data cannot be ascribed to the tax responsiveness of overstating actual giving In fact. overstatement is apparently less price responsive than actual giving, implying that the responsiveness of actual giving is higher than is suggested by studying reported contributions.