Flying under the Radar: Ghosts and the Income Tax

Abstract

The tax compliance literature is primarily focused on taxpayers who fail to accurately report their taxes when they file their returns. In this article, our focus is on 'ghosts'-individuals who do not even file a tax return. To learn more about this relatively understudied population, we examine a combination of US administrative data and matched Census survey data. Our results indicate that 10-12% of US households with a federal filing requirement fail to file a timely income tax return. Approximately 40% of such households do eventually file a late return. However, the tax gap associated with those who never file is substantial, amounting to an estimated 18-20 billion each year. To gain new insights into what drives individuals to become ghosts, we employ a novel econometric methodology (calibrated probit analysis). We find that the failure to file a timely return is negatively associated with age and income, but positively associated with having a high filing burden and being married. Taxpayers with income near the filing threshold are also less likely to file on time, particularly if they are not eligible for a refundable tax credit. We also find evidence of regional variation in filing compliance.