ABSTRACT This study examines whether taxpayers intentionally avoid Internal Revenue Service (IRS) third‐party reports. In 2017 an IRS amendment created a quasi‐exogenous shock that reduced third‐party tax reporting of pari‐mutuel gambling winnings from certain types of wagers. I consider the effect that this rule change had on taxpayer behavior. Using a difference‐in‐differences research design comparing thoroughbred racing in the United States to Canada, I find a 27% increase in gambler's investment into wager‐types that became less likely to trigger third‐party reports. Further, I provide evidence that this effect was because of third‐party reporting, not withholding, and was stronger in more informed gambling populations. These findings suggest that taxpayers knowingly avoid third‐party reports, enabling underreporting of income to the IRS. This has important policy implications because underreported individual income is the largest driver of the $496 billion annual gap between legal tax liability and actual tax collections in the United States.

Abstract We examine how progressive individual tax rates affect risk‐taking by pass‐through businesses (PTBs). PTBs generate over 60% of US business income and make up roughly 95% of business tax returns, yet there is limited research on how progressive tax rates affect project selection. We study PTBs using the setting of thoroughbred racing and examine how progressive tax rates affect the decision to enter a risky stakes race or a less risky allowance race. This setting provides a unique opportunity to observe the choice between two mutually exclusive projects that differ only in expected payoffs and risk. Using a difference‐in‐differences design surrounding the reduction in progressivity under the Tax Cuts and Jobs Act, we find that investment in stakes races increases in the United States relative to Canada. We find further evidence of a negative relation between progressive tax rates and risk‐taking using a plausibly exogenous shock in progressivity in California and exploiting cross‐sectional variation in the progressivity of state tax rates. Overall, our findings should be of interest to policy‐makers considering changes to progressive rates. Results indicate that increases to progressive tax rates may discourage risk‐taking by the small businesses that drive economic growth.