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And still the underground economy, beyond the reach of tax authorities, thrives and whets the government's appetite.
congressional hearings in the 1990s. Tax agents were waging SWAT-style raids on homes and businesses, using phony credentials, pointing guns at people, and generally acting like an occupying army. The IRS pulled in its horns after public outrage led to tongue-lashings by powerful lawmakers and much embarrassment.Abuses by tax collectors in the United States led to
But when a government is running up a multi-trillion-dollar debt and has abandoned any pretense of fiscal discipline, that tax gap starts looking like a piggy bank, and there are always tax collectors willing to do some smashing.
The international experience suggests that enforcement efforts don't do much to budge the bottom line. Compliance is largely a matter of finding the right price. Keep taxes within an acceptable range and maintain a system that people perceive as reasonably fair, and you'll get a decent amount of compliance (but never 100 percent). Raise the price, and people stop paying.
And when they stop paying, it's hard to get those customers back. Writes Schneider (PDF):
But even major tax reforms with major tax rate deductions will not lead to a substantial decrease of the shadow economy. Such reforms will only be able to stabilize the size of the shadow economy and avoid a further increase. Social networks and personal relationships, the high profit from irregular activities and associated investments in real and human capital are strong ties which prevent people from transferring to the official economy.
That is, once people get used to operating in the shadows, and make connections there, it becomes increasingly difficult — and unattractive — for them to come back above-ground.
Just recently, to resolve the "fiscal cliff" financial crisis that predated the sequestration financial crisis, politicians hiked income taxes on higher-income Americans, and sneakily raised payroll taxes on most of the rest of us. If the economists are right about the record of taxes and tax enforcement around the world, that will lead to higher levels of non-compliance, no matter what enforcement efforts are put in place.
But it's not only taxes – the rest of the economic environment matters, too. Remember, two of the four reasons Schneider gave for people fleeing the tax man have to do with regulations and bureaucracy. And, indeed, he finds, "every available measure of regulation is significantly correlated with the share of the unofficial economy and the sign of the relationship is unambiguous: more regulation is correlated with a larger shadow economy." In particular, enforced regulations — not just nominal red tape to which people turn a blind eye — drives people into the shadows.
Summarizing the argument, Professor Pietro Reichlen of Rome's Luiss University told the Financial Times in a June 2011 article on Europe's hidden economy, "Among the main causes of the black economy is the level of taxation. The higher the tax and the regulatory burden the bigger the shadow economy of the country." He recommended simplifying and reducing taxes, reducing the regulatory burden, including laws that make it difficult and expensive to hire and fire workers, and improving often-corrupt, archaic and unresponsive judicial systems.
But that's not the tack the current administration has taken. The Associated Press reported in December 2012, "since the election, the Obama administration has quietly reopened the regulations pipeline."
Investors Business Daily cautions:
The cost of regulation to the economy is already $1.8 trillion a year, according to reliable estimates by various think tanks and by the Small Business Administration.
In coming years, that will surge. In the first three years alone, Obama added $46 billion a year to regulatory costs — compared to just $8.1 billion under Bush.
So, taxes are going up, not down, and regulations are tightening, instead of loosening. even as the federal government wants more revenue. And our fearless political leaders do want more. Even with the oh-so-brutal cuts ... err ... reductions on the rate of increase in federal spending, the federal government is expected to run a deficit of $845 billion this year, according to the Congressional Budget Office (PDF). In fact, it's expected to run deficits in the hundreds of billions of dollars for the foreseeable future. That's based on assumptions of 3.4 percent economic growth in 2014, and 3.6 percent growth from 2015 through 2018. That's after economic growth of 2.2 percent last year and 1.8 percent in 2011 (PDF).