Tax cheating is out of control

Back in June I asked why tax rates are so high. No one gave me an adequate answer.

Part of the answer is found in today's New York Times. Rich people are cheating to the tune of $70 billion/year. This amounts to 7 cents of every tax dollar collected. Massive tax cheating causes higher rates for honest taxpayers.

It really annoys me that economics bloggers like Greg Mankiw are obsessed over the minimum wage when rich people are cheating on their taxes by an amount greater than the aggregate additional salary that all 15 million low wage workers would realize from a $2 increase in the minimum wage. Isn't tax cheating a much bigger problem than a small increase in the minimum wage? Why don't right-wing economics professors care about real problems?

Tax cheating is a huge drag on our economy because the higher tax rates necessary to make up for the cheating discourages honest investment.

Comments

[JewishAtheist]

Why don't right-wing economics professors care about real problems?

Because they're right-wing.

[SFG]

Dude beat me to the punch.

Lefties always worry about the powerless, righties about the powerful. Has HS looked at income vs IQ and political views? i.e., do smart people with low incomes vote Democrat?

[SFG]

Dude beat me to the punch.

Lefties always worry about the powerless, righties about the powerful. Has HS looked at income vs IQ and political views? i.e., do smart people with low incomes vote Democrat?

[Half Sigma]

"Has HS looked at income vs IQ and political views?"

Yes, higher income is correlated with "conservative" economic views.

Higher IQ is correlated with more libertarian views.

[superdestroyer]

HS,

Shouldn't you also criticize Senator Levin (et al) who has repeatly voted for a more complicated tax system, has voted for a multitude of laws that have created a 50,000 page tax code, and has supported a system of taxes that virtually mandates the use of high price tax attorneys. Senator Levin supports a complicated system yet he complains when groups take advantage of the laws that he supported.

[Half Sigma]

"Shouldn't you also criticize Senator Levin"

I HATE Democrats.

[Peter]

People who aren't rich might cheat more on their taxes if they could. The thing is, it's hard to cheat if most of your income comes from wages subject to withholding or interest earnings for which the financial institutions issue 1099's. Wealthy people are more likely to have substantial amounts of income from other sources and therefore have more opportunity to cheat.
Some years ago, a popular scam among college students was to claim the Earned Income Tax Credit for children that didn't actually exist. It took years for the IRS to catch onto the scam and begin requiring Social Security Numbers for all dependents.

[Mark]

It's not your or the gov't's money. Taxation is extortion.

[Half Sigma]

"It's not your or the gov't's money. Taxation is extortion."

Last I checked, the U.S. was a government of the People. Through the democratic process we volunatarily decided to give some of our money to the government to be spent for the common good.

Tax cheating is a transfer of money from honest people to crooks.

[Mark]

Taxation is a transfer of money from honest people to crooks.

[mickslam]

Im a democrat HS - and wacked out kooks like mark are part of the reason why.

I think some people, like me, choose their political party on how well they handle the kooks in that party. I can hang out with hippies that want to live in communes and such, but people who think that all government is bad simply make me shudder. Its like they never think of the consequences of lack of governement, even though Africa is filled with examples and bodies from those examples.

[bbartlog]

Government has killed more people than anarchic violence, at least in the past thousand years or so. Somalia was no paradise during its fifteen or so years of anarchy, but the murder rate was about the same as what you see in Mexico today. Compare Zimbabwe and see what happens when government goes bad.
Anyway, I don't see how you can describe tax cheating as a transfer of money from honest people to crooks - obviously no transfer is taking place.

[R. Alex]

It's worth pointing out that many economists and right-wing types really dislike the complex tax code that gives tax-cheaters the cover to do their cheating. They needlessly bundle the two, but one of their reasons for supporting the "flat tax" is because it would simplify the code.

Of course, actually simplifying the tax code is much more difficult than raising the minimum wage...

[Douglas Knight]

I've heard that big companies are automatically audited every year. They have office space set aside for the IRS. I find this kind of disturbing, but if we accept it, why isn't it applied to individuals? Maybe that's not so far from when the report suggests removing "the underlying legal presumptions."

The claim that “no one, not even the United States government, could go after all of it,” seems very strange to me. My impression is that IRS investigators, at least those focused on the rich, are cost-effective; if congress wants to fight tax fraud, it can easily hire new investigators, but instead it removes them or reassigns them to the poor.

[SFG]

"I think some people, like me, choose their political party on how well they handle the kooks in that party. I can hang out with hippies that want to live in communes and such, but people who think that all government is bad simply make me shudder. Its like they never think of the consequences of lack of governement, even though Africa is filled with examples and bodies from those examples."

Quite a bit of truth to that. I was always wary of the Republicans because of the white supremacist element. Not that all Republicans are WS...I was just talking to one who was quite eager to nominate Condoleeza.

[spungen]

I picked my party back in college, based on who had more attractive male members.

i'm pretty sure if i was audited that the irs could call me tax cheat. and that's not so much by choice (unless by choice you mean that i refuse to hire an accountant and the tax code is too complicated for me to understand). sometimes the irs refuses to define the tax code! for example, there is no well defined rule about what constitutes a wash sale in regards to stock options. that is both crazy and frustrating. i can only imagine how complicated it is for the five percent of the population that are doing more complicated things than me.

[mvpy]

This is great news. Im all for tax cheating; its just equivalent to a pro growth tax cut - which provides more incentives to work and invest.
Lord knows, the rich pay enough federal taxes already, dont they?

[christy]

You're also ignoring the fact that the rich still pay far more into the system than the poor. Not that it excuses tax cheating. I think there are a lot of different causes for the "tax gap" and none of them make for particularly exciting talking points. After sitting through a tax procedure seminar last semester I've come to the conclusion the only way you could really make substantial progress in this area is a complete overhall and simplification of the tax system.

[dearieme]

In Britain:-

In his benchmark ruling of 1929 however, Lord Clyde, Lord President of the Court of Session stated in a leading case that;

“No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The taxpayer is... entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue"

[mickslam]

"It's worth pointing out that many economists and right-wing types really dislike the complex tax code that gives tax-cheaters the cover to do their cheating. They needlessly bundle the two, but one of their reasons for supporting the "flat tax" is because it would simplify the code."

I would change the word 'needlessly' to 'intentionally'. Most of the complexity of the tax code was demanded by these right wingers in the first place. Not only does it make it easier to cheat, ususally the complexity is to give someone, somewhere a break on their taxes. The crazy treatment of differenct sources of income in the US is a criminal act.

I also think the rich deserve to pay more in taxes. They get much more benefit. In many places in the world, losing your money to gangsters is a real threat.

[mickslam]

SFG,

For me, the WS are a big deal, but the racism and unwillingness to see why class predetermines so much of life is the biggest.

Most republicans refuse to see how much of a success in life you are has to do with your parents. My dad, actually my step dad, a super-smart, insanely motivated guy who should be a lawyer or investment banker or huge business owner, is a struggling small businessman. After being beaten essentially daily by a drunken jerk who spent the paycheck at the bar, living in poverty (my favorite of his descriptions; bread sandwich) for his entire childhood with parents who probably said less than 10 words a day to him, he somehow believes that class has nothing to do with it. I know people the same age, half as smart, 1/10 as motivated, who make thousands of times as much as he ever will. Their dads were rich guys.

And oddly enough, I support much of the economic conservative idea: I would rather have businesses do something than goverement. I am a natural republican. I just can't stand the racism and freaky anti-goverment all the time thinking, can't stand the denial of class in the US.

[spungen]

Yeah, Mickslam, it's hard to affiliate with people you suspect look down on you, no matter what. I remember that in my little campus tour of the political groups I stopped first with the libertarians, bc I liked Ayn Rand. It was mostly white guys. They were quite polite and friendly, but most of their discussions had to do with why women, minorities, and/or the poor were a bunch of whiny scheming losers.

The Republicans had more women and money, and were better-dressed, but basically the same message. They were a big group there, unlike most schools. Couldn't help wondering why a bunch of kids from well-off families couldn't go to a better school.

The Democrats were also mostly guys. Like the libertarians, a substantial percentage were too old to be living at home with parents or attending undergrad, yet still were. But, at least I did not feel they were actively hostile to my interests.

[cpurick]

Possibly the stupidest argument for paying taxes "honestly" is the notion that cheating somehow forces others to pay more. Such an argument implies that taxes are set with a revenue target in mind, which is obviously not the case. If it was, the government would have switched from static to dynamic revenue projection a long time ago. The fact remains that if all the cheaters suddenly got religion revenues might swell, but nobody would get a tax break.

Look at this (stupid, for lack of a better word) thought from HS:
"Through the democratic process we volunatarily decided to give some of our money to the government to be spent for the common good."

When one infers that to mean the majority votes to fund the government with the wealth of the richest minority -- which is exactly what our host is really saying -- it's a lot less benevolent than he tries to make it sound.

It's already been pointed out that only the rich pay meaningful taxes in the first place. There's no reason -- none whatsoever -- to think that the poor wouldn't cheat on their taxes if they had to pay them. The useful idiots around here are wont to make interpersonal utility comparisons, so it would be rather hypocritical to think that poor people are less inclined to cheat on their taxes than the rich.

I don't cheat on my taxes, but I have no problem -- except maybe a little envy -- with anyone who does. I'm smart enough to know that the government will take all it can either way. Besides, I'd just as soon the government not have your money to fund programs that are just as likely to hurt me as they are to help anyone else.

It's about time for some of these idiots to grow up and accept that the conservative opposition to minimum wages includes a firm conviction that the wages don't help the target group. That's basic economics. You might disagree, but please note that the people who believe in basic economics certainly do seem to most of the money, don't they? They may be "greedy" (a horrible word with no place in real economic discussion), but that doesn't mean they're not right.

[Douglas Knight]

cpurick:
accept that the conservative opposition to minimum wages includes a firm conviction

No, I don't see any evidence to believe that the conservative movement has any firm convictions at all, let alone economic understanding.

[Mark]

Thanks spungen for the the intelligent post, compared to state-worshipping slime like Mickslam and others. The statists are violent people, who want to punish those who are more successful. Minimum wage laws and taxation are pure coercion by those with guns and badges.

[SFG]

"I picked my party back in college, based on who had more attractive male members."

A friend of mine claimed leftism was a great way for dorky guys to get laid. Certainly it worked for him in college. He really did believe in the philosophy, though.

Me, I just figure with the marketing economy HS has described so eloquently, the free market offers little for people with relatively poor social skills. A lot of political preference is self-interest when you scratch down deep enough...some might even argue that picking a party that will help you is economically rational.

"The statists are violent people, who want to punish those who are more successful. Minimum wage laws and taxation are pure coercion by those with guns and badges."
You're right about the _ressentiment_, but um, liberals are more violent? Who's been starting all the wars lately?

[Mercy Vetsel]

"It really annoys me that economics bloggers like Greg Mankiw are obsessed over the minimum wage...”

It's not economists who are obsessed with the minimum so much as demagogues and politicians who either don’t know or don’t care that minimum wages laws hurt the poorest people most. Any economist who says otherwise is a partisan hack.

The $70 billion figure is utter nonsense. Many wealthy individuals and corporations have the luxury of being able to structure their finances to minimize taxes or in fact to leave the country. I’m sure that for envy-ridden left-wing bloggers this would be a great outcome, but for the rest of it would not.

While this type of structuring may enrage greedy fans of big government, it’s silly to claim that $70 billion of “missed” taxes is due to cheating. Does anyone really think the IRS wouldn’t be going after this money and throwing people in jail if it were?

-Mercy

[Douglas Knight]

Mercy,
The $70B is believed to be prosecutable. Read the article.

[Mercy Vetsel]

Everything is prosecutable. Read my question. Why not prosecuted? If the issue were black and white (as the "cheater" label implies) would $70 billion worth of wealthy people be risking jail time?

-Mercy

[bbartlog]

It might well be black and white if brought to court. As with immigration law violations, there are often political directives from on high that result in very little prosecution. Simply not having enough staff to pursue the cases could easily make things work out this way; if the IRS has five hundred agents who have the ability to prosecute such cases, and each one takes half a person-year to resolve, the threat of being caught would be small. And these days the IRS is only really punitive when dealing with tax deniers (those who claim not to be a 'person' for legal purposes or claim that the IRS has no legal authority to collect taxes, etc. etc.). So if they catch up with you, they'll often settle for no more than you would have owed in the first place. Happened to both me and my father-in-law at different times. I get the impression that the individual agents are evaluated mostly on the number of cases they close, not on how much they manage to squeeze you for; hence the easy terms.

[Douglas Knight]

To elaborate on what bbartlog said, I remember stories during both the Bush and Clinton administrations of the IRS declaring that it was going to do fewer audits of the rich. In one case, it was going to do more audits of the poor, while in the other, it was an overall reduction. As I said above, my understanding is that tax investigation of the rich is cost-effective.

Most recently, the IRS reduced the number of people investigating inheritance tax.