The article describes an experiment that examines the effect of three audit schemes on taxpayers' joint or related decisions about the level of labor to be supplied and the amount of income to underreport in the United States. Individuals failed to report between $70 and $79 billion in federal taxes due on legal income received in 1986. This amount is equivalent to approximately 20 percent of federal income taxes due and 40 percent of the federal deficit in that year. This problem can be countered by auditing self-reported income; An audit scheme is the approach by which a taxing authority chooses the self-reports to be audited. The three audit schemes differ principally in the information used by the taxing authority to determine which self-reports of income to audit: no information is used--reports are chosen strictly at random; reported income is the basis for choosing the reports to be audited; an estimate of true income is used in addition to reported income to select audit cases. The taxpayer's labor response to the tax system may not be determined solely by the direct effect of tax rates.

Preferred Stocks, Foreign Tax Credits, Tax Reform Act, Tax burden

Although firms account for entity-level taxes, they do not account for shareholder-level capital gains and dividend taxes. To account for these proprietary-level taxes, we add them to a residual-income equity valuation model. Empirical analysis supports the model's predictions. First, both capital gains and dividend taxes reduce investors' implicit valuation of the reinvested portion of earnings. Second, dividend taxes reduce the valuation of the portion of earnings distributed as dividends, but capital gains taxes do not. Third, dividend taxes reduce the valuation of retained earnings equity, but again, capital gains taxes do not. These findings suggest that investors implicitly extend entity-level accounting to the proprietary level when they value the firm. The findings also suggest that when fully accounting for the effects of implicit dividend taxes, reinvested earnings appear to be subject to three levels of taxation—corporate, dividend, and capital gains taxes. Paying earnings out as dividends eliminates the capital gains layer of tax and may provide a net wealth benefit for shareholders, rather than a tax penalty as commonly assumed.

We exploit a unique experimental setting within the life insurance industry to examine the effects of taxes, regulation, earnings, and organizational form on life insurers' investment portfolio realizations. A unique equity tax levied on mutual life insurers, as well as the statutory rate variation that occurred during our sample period, allow us to disentangle the effects of taxes from earnings or profitability. Consistent with some policymakers' claims, we find mutual insurers' capital gain realizations are affected by company-specific equity tax rate variation. In addition, we find capital regulation and earnings considerations affect both stocks' and mutuals' realizations.

Taxation, Income shifting, Valuation, Tax rate

Banking, Regulatory capital, Financial reporting, Tax incentives