Tax evasion in the presence of negative income tax rates

This paper examines the impact of marginal tax rates, which incorporate the earned income tax credit (EITC) as it existed in 1988, on the reporting of income by low-income taxpayers. We generally find that misreported income is not affected by tax rates, except for proprietors. Negative marginal tax rates, which occur in the phase-in range of the EITC, do not appear to affect the amount of income overreported, irrespective of the source of income. Furthermore, the amount of income underreported does not appear to be affected by the relatively high marginal tax rates which occur in the phase-out range, except for proprietors. Even in the case of proprietors, the effect on the understatement of income is modest.