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The Effects of Introducing Withholding on Tax Compliance: Evidence from Pennsylvania’s Local Earned Income Tax

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Abstract

This paper examines Act 32 of the Pennsylvania state legislature which mandated the introduction of withholding for the local earned income tax (EIT) for all employees and the consolidation of a fragmented collection system to one collector per county effective January 1, 2012. I find that the act resulted in increased compliance with the EIT of about 14 percent, with the increased compliance driven entirely by an increase in revenues as opposed to changes to the tax base or rates. I confirm this result using a differences-in-differences analysis that contrasts tax compliance for school districts in Pennsylvania with those in Iowa – the only other state where a majority of school districts levy a local income tax. Falsification exercises examining compliance with the property tax confirm that Act 32 did not impact the property tax in either the event study or the differences-in-differences analysis.

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  • Sutirtha Bagchi, 2022. "The Effects of Introducing Withholding on Tax Compliance: Evidence from Pennsylvania’s Local Earned Income Tax," Villanova School of Business Department of Economics and Statistics Working Paper Series 58, Villanova School of Business Department of Economics and Statistics.
    • Handle: RePEc:vil:papers:58
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    File URL: http://repec.library.villanova.edu/workingpapers/VSBEcon58.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Earned income tax; Tax compliance; Withholding; Event Study;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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