As Government Grasps For Taxes, Brace for an Unwinnable War Against You

Uncle Sam has worked up an appetite

(Page 3 of 4)

And still the underground economy, beyond the reach of tax authorities, thrives and whets the government's appetite.

Internal Revenue ServiceInternal Revenue ServiceAbuses by tax collectors in the United States led to 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.

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).

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • Tony||

    There's about a 99.995% compliance rate on laws against murder in this country. Clearly we're expending way too much effort prosecuting murder.

  • Calidissident||

    In Tonyland, not paying your taxes is equivalent to murder.

    Also, Tucille's main point is that there's a limit to how high a compliance rate you can realistically attain, and that there's always going to be a "tax gap"

  • Mr. FIFY||

    No, in TonyLand, not paying *enough* taxes is like Hitler having sex with toddlers.

  • Sevo||

    "Also, Tucille's main point is that there's a limit to how high a compliance rate you can realistically attain, and that there's always going to be a "tax gap""
    Shithead is aware of this constant 'swoooshing' sound but seems never to figure out what it indicates.

  • John Galt||

    The wind blowing swoooshing through his empty skull?

  • Rhino||

    that's because in Tonyland, the only reason people don't murder each other is because there are laws against it. Pretty pessimistic.

  • Sarah Conner||

    That's really the issue. These conservatives who call themselves "progressive" all think that every single person is just a power outage away from a murderous rampage against their neighbors.

    It's really a very ignorant and atavistic view of the human animal, and one that ignores all the evidence to the contrary isn't it?

    Jackboots and armbands disguised as "liberal". That's our Democratic party.

  • Sevo||

    Sarah Conner| 3.7.13 @ 6:55PM |#
    "That's really the issue. These conservatives who call themselves "progressive" all think that every single person is just a power outage away from a murderous rampage against their neighbors."

    From another perspective, they (shithead included) presume the rest of us are the same infantile excuse for moral agents that *they* are. Only the government can keep them from making bad choices! And since they're so "smart", everyone else must be the same.
    The concept of adult moral agency is beyond the limited mental skills of shithead and his like.

  • ||

    Considering that the clearance rate for murder is about 65%, this would seem to support your conclusion.

    Yet, statist will keep telling us that the only thing keeping us from donning viking helmets and wielding maces, murdering each other for the juice to fill our motorcycles, is them.

    Why more people aren't insulted is beyond me. I assume they always think politicians are talking about someone else. Morons.

  • Bruce Majors||

    This isn't compliance. Most people have withholding. If 17% of taxpayers are to complying that may be a majority of independent contractors are business owners who actually don't have withholding.

    Everyone should stop paying taxes?

  • grey||

    I dream of the day there is no withholding. The minute the masses saw their wages before the theft and had to hand money to the tax man is the minute we have millions of converts to small government.

  • Rhino||

    You don't have to oppress people into not killing each other. To believe that's the case is pretty pessimistic. You're saying that people are generally evil and will do evil things to each other unless there is the threat of punishment.

  • fish_remote||

    I miss your pretentious extra spaces...just when did you go Mr.Conventional.

  • Lisa G. Wyrick||

    as Deborah said I am stunned that any body can get paid $7533 in a few weeks on the internet. have you read this site link...

  • John Galt||

    Wow, Tuccille is a real life Testees.

  • Sevo||

    "And kicking in doors and staging intrusive audits runs the risk of making the government "the enemy" in the eyes of many Americans"
    Some of us are already there.

  • John Galt||

    Remember the good ole days when Bill and Hillary used the IRS as their personal attack dog?

  • Sevo||

    If the reports are true, Nixon tried but didn't get far with it.
    Sort of amazing that you can look back on that twit with nostalgia; he's better than we've had for at least 13 years.

  • John Galt||

    Well, actually I was being sarcastic with the nostalgic part.

  • John Galt||

    The IRS abuse part I was serious about.

    Apr 23, 2002 – An official with the Internal Revenue Service has admitted that legal opponents of former President Bill Clinton were singled out for tax audits Here and Here for example

  • gaijin||

    I've always wondered if redistricting might not make it easier to do this type of things at scale...i.e., pick a red or blue district (the opposite of whoever is in charge) and focus IRS compliance examinations there.

  • Philbert66||

    until I saw the check 4 $6936, I didn't believe that my father in law was realie earning money part-time on their computer.. there aunt had bean doing this less than eighteen months and at present repaid the depts on there mini mansion and got a great Infiniti. this is where I went,

  • Sevo||

    Philbert66| 3.7.13 @ 8:10PM |#
    "until I saw the check 4 $6936, I didn't believe that my father in law was realie earning money part-time on their computer"

    Filbert is a nut.
    He's not; he's lying.

  • Harvard||

    One benefit of business ownership is the ability to cheat on your taxes and I savored my opportunity, one severely limited to wage earners. After a long and successful career I realize that over my career I cheated comensuerate with the length of the government shaft up my ass.

    More regulation? More cheating.

    Higher rates? Much more cheating.

    My best accountant told me right after I started my business. "The IRS never puts you in jail unless you can't pay the tax due plus penalty and interest". Therefor, avoid fraud but always be highly creative with your addition and the truth. My crowing achievment was a completely new (huge) $60K kitchen, replete with custom cabinetry on the company dime.

  • Sevo||

    Suffice to say, I have been on both sides of the alternatives you mention. I agree and applaud your efforts.
    Any way shape or form to keep tax money from the government is laudable. Far better if you don't have to pay for the efforts.

  • Harvard||

    Next best tax advice, this from my corporate lawyer. Hire a high school student to write checks. She/he comes in for a couple of hours after school, writes the day's checks (business and personal), does some minor filing, and goes home. Next year you hire a different one.
    When the checks for your kitchen re/do show up on the company spread sheet as Leasehold Improvements you slap your forhead and tell the IRS auditor "that idiot!!! Those should have been written from my PERSONAL account". You pay the tax, the penalty and the interest, but you need not hire the lawyer for your fraud defense.
    Plausible deniability in the finest John Poindexter tradition.

  • SumpTump||

    No way man, who thought of that.

  • Bruce Majors||

    I'm not sure your compliance rate number has any meaning either in itself or with cross national comparisons. Most people in the United States pay their taxes in advance and then get a refund, via withholding. They don't have a choice about whether to comply. Indeed by filing paperwork they get some money back.

    A true measure of compliance would be to see what percentage of people who are self employed or independent contractors file. Even there there is enforced compliance. Any many states for example, failure to file state taxes results in the suspension of professional and business licenses.

    If almost 20% of taxpayers are in non-compliance it must be a truly huge percentage of people who don't have withholding. This would explain why the major advertiser on many radio an TV shows, particular those devoted to "conservative talk" seem to be two or three large national tax resolution companies.

  • grey||

    Yes, and there is something to be said for when you open your first business and try to understand what you owe and when. I'm not sure how to say it, but essentially non-compliance through ignorance. Not purposeful non-compliance, but otherwise intelligent, self-employed people, staring at pages and pages of regulations and tax law and wondering WTF? Most just hire tax professionals, but many who haven't accepted it as a cost of doing business face a multitude of decisions each tax year about what is lawful and what is illegal.

    I still feel like I'm not communicating my point. Non-compliance is built up of more than willful tax avoidance, but has a component of those not understanding a very complex tax code. And anyone just spitting out a simple tax rate, go fuck yourself. Until you have your own business and deal with business specific tax code, incomprehensible definitions of 'income', 'deductions, 'expenses', 'depreciation', that leave you scratching your head - then it may be hard to relate if you just listen to MSNBC and receive a W-2 each year. To those people that never 'built it', it is mostly just a money grab and they could care less how painful or time consuming the tax code is to builders.

  • Dalton56||

    my best friend's sister-in-law makes $84 an hour on the computer. She has been fired for five months but last month her pay was $14040 just working on the computer for a few hours. Read more on this web site

  • yooper||

    if we have an underground economy ,
    how do they know the percentage ?

    I would never consider paying friends and acquaintances in business in cash and not needing a receipt. ;) leaveing the tax decision to them .
    or trading work for work.

  • juliabraon||

    like Marjorie explained I'm impressed that someone can get paid $6637 in a few weeks on the computer. have you read this link


    What should I say. I think one should pay tax to government. This is all for our benefits only. But I know paying tax is very painful. As we work for so long and a years to earn this much of money. But government is taking this for country development only


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