Three Cheers for Tax Scofflaws (They Keep Us Afloat and Limit Government's Reach)

Taxes401(K)/FoterToday is Tax Day, the day by which Americans' tax returns must be postmarked or electronically submitted in order to avoid the wrath of the shakedown artists at the Internal Revenue Service. Mind you, that's not the same as Tax Freedom Day, the day on which Americans as a whole have earned enough money to pay the year's total tax bill—that's April 21 in 2014, three days later than last year. But the bill due on Tax Day isn't high enough for some, nor is Tax Freedom Day late enough in the year. Jonathan Cohn, of The New Republic, thinks the U.S. government should follow the example of other regimes that demand a bigger take from people's labors and that "a bigger April 15 bill would mean a better society."

What Cohn fails to mention is that tax-happy governments tend to drive tax-averse people to hide in the shadows, concealing vast shares of the economy from officials, and severely limiting the reach of the state. If prople like Cohn really want to emulate other country's tax rates, he'll have to take their off-the-books economies, too—and the limits they impose on what the state can actually take.

Cohn writes in praise of all the good things he sees in a high tax tab.

That payroll tax taken out of everybody’s check? It’s buying you Medicare and Social Security, which means a more secure retirement free of crippling medical bills. Your federal income tax? Its effects are a lot more diffuse. But chances are pretty good that you’ve already used some infrastructure today—whether it was a road or railway you took to work, or maybe the information technology connections you’re using to read this article. Federal, state, and local taxes helped pay for that. Is your water and air clean? Are you safe from threats, domestic and foreign? Then you’re getting something valuable from the Environment Protection Agency, the Federal Bureau of Investigation, and the Department of Defense. Your tax dollars paid for those, too.

He has a tough sales job ahead of him, though. Seventy-six percent of respondents to our recent Reason-Rupe poll say that private charity does as well or better than government in getting mileage from their tax dollars. That means Americans are unlikely to knuckle down and submit to a bigger bill without protest. That's no small concern when you consider that the U.S. has traditionally had the highest income tax compliance rate in the world, and the smallest shadow economy—that is, people engaging in otherwise legal economic activity, but out of sight of the tax man and regulators.

But that's changing.

In recent years, the income tax compliance rate in the United States dipped to 83.1 percent. That's still high, compared to the United Kingdom at 77.97 percent or Switzerland at 77.7 percent, but the gap is closing.

The U.S. shadow economy has also traditionally been smaller than that of other countries. But last year, estimates that it had reached $2 trillion and might account for the country avoiding a return to recession made headlines.

"You normally see underground economies in places like Brazil or in southern Europe," said Laura Gonzalez, professor of personal finance at Fordham University. "But with the job situation and the uncertainty in the economy, it's not all that surprising to have it growing here in the United States."

Estimates are that underground activity last year totaled as much as $2 trillion, according to a study by Edgar Feige, an economist at the University of Wisconsin-Madison.

That's double the amount in 2009, according to a study by Friedrich Schneider, a professor at Johannes Kepler University in Linz, Austria. The study said the shadow economy amounts to nearly 8 percent of U.S. gross domestic product.

Why the sudden growth?

Schneider, the shadow economy expert mentioned in that CNBC story quoted above, remarks, "In almost all studies it has been found out, that the tax and social security contribution burdens are one of the main causes for the existence of the shadow economy." He adds, "The bigger the difference between the total cost of labor in the official economy and the after-tax earnings (from work), the greater is the incentive to avoid this difference and to work in the shadow economy."

Which is to say, if you raise taxes, many people stop paying part or all of them. They hide their efforts, and their income, from the government. In fact, a lot of countries have much bigger economies than official figures suggest, since so much of it happens off the books. If underground activity is equivalent to 8 percent of the U.S. economy, it might be 15 percent of Sweden's, and 20 percent of Spain's.

So, that larger government take that Cohn likes so much becomes nominal, since it's only a share of the official portion of the economy. In fact, once you adjust for the size of the shadow economy, the government's share in the U.S., at roughly (my estimates) 39 percent, is nearly identical to the German state's 40 percent.

Cohn and his friends may not like to hear it, but the tax scofflaws who flee the high taxes he favors have already been credited with keeping America out of recession, and Spain functioning at all. Let's hear it for their scofflaw efforts.

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 Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • Pro Libertate||

    Please stop taking my money. I have kids and a wife to support.

  • Concerned Citizen||

    You fool! You want to live in a cave, like everyone did before the income tax?

  • Pro Libertate||

    That seems fair--no taxes, live in a cave.

  • From the Tundra||

    Yep, I'll take that deal.

  • MJGreen||

    You'll still have to deal with the EPA.

  • Pro Libertate||

    Crap, does that mean that caves are wetlands? That's no deal at all.

  • Vampire||

    Take your hatred of those who live in and/ or have vacation caves elsewhere you big meanie!!

  • Fist of Etiquette||

    Jonathan Cohn, of The New Republic, thinks the U.S. government should follow the example of other regimes that demand a bigger take from people's labors and that "a bigger April 15 bill would mean a better society."

    If that's truly the gist, I can say with certainty that a better name for Cohn's article would be "I'm Economically Illiterate and I Can Prove It".

  • Anonymous Coward||

    Taxes are the philosopher's stone of utopia. All the state has to do is convert it from its base state of evil, greedy, individually held money, to holy, sanctified government expenditures, and paradise shall be ours.

  • Concerned Citizen||

    ^ stealing this.

  • sarcasmic||

    THE+IRS = THEIRS

  • BakedPenguin||

    Very nice.

  • Sudden||

    Update on my mailing issue with my taxes:

    Yesterday I mailed my taxes via certified mail, but the labels the machine printed out were too big for the envelope so I had to snake it around the top and sides in order to make sure I didn't cover the address I was mailing to. The certified mail tracking numbers have not shown up with any updates showing scans per the USPS website. Now I'm kinda worried. Should I file for an extension online and then take a wait and see approach on the check I sent the feds clearing? I don't wanna send a redo of the taxes today because then the IRS might double charge me since there's a check in the first piece of mail.

  • PRX||

    The certified mail tracking numbers have not shown up with any updates showing scans per the USPS website. Now I'm kinda worried.

    USPS often doesn't post a thing until it's delivered.

  • Sudden||

    Alright. Guess I'll just roll the dice and hope it gets in with a 4/14 postmark. Can't afford a penalty.

  • Agammamon||

    Uhm, go back to the post office and ask them to check?

  • Sevo||

    "Uhm, go back to the post office and ask them to check?"

    Yeah, and look for unicorns on the way, too!

  • Certified Public Asskicker||

    Do you have a receipt indicating you mailed it certified?

  • Sudden||

    Yes, but it only shows the zip code it mailed to, not the actual address. I think it'll be enough should the mail not arrive.

  • Sevo||

    "a bigger April 15 bill would mean a better society."

    Yeah, higher taxes really work well:
    "Italy's tax evasion highlights large underground economy"
    [...]
    "Caruso noted, however, that the undeclared income "does not take into account widespread black working," meaning that the real size of Italy's underground economy is "widely underestimated."
    http://news.xinhuanet.com/engl.....069451.htm

  • creech||

    It is time once again to remind ourselves that Holmes was wrong:
    Taxes are what we pay because we DON'T have a civilized society. And also, "From each according to his needs; to each according to his abilities."

  • Acosmist||

    I did some work last year for which I was paid cash. It was a considerable amount. I actually was dumb enough to report it and holy shit the tax bill.

    Lesson learned: either avoid economically productive activity entirely, or don't report the income. Thanks, feds.

  • gimmeasammich||

    I am under the belief that this is why cab drivers don't like accepting cards. With no paper trail it is easy to just say that you had a "slow year."

  • BigT||

    Yes, and waiters/waitresses, barbers, etc. Whenever I can I pay these good folks in cash. It's a thousand F-You's to Uncle Obama.

  • craiginmass||

    And a big middle finger to our Vets, Service Folks and millions more!

    Thanks!

  • politicsbyothermeans||

    A pious Masshole. Imagine that.

  • BakedPenguin||

    I worked as a contractor for a lot of last year. Pretty brutal to get the bill.

  • From the Tundra||

    Particularly the penalty if you didn't tithe during the year.

  • Vampire||

    There are still property taxes, food taxes, phone, tv and Internet bill taxes, cell phone taxes, travel taxes and so on to continue paying. So it is not over on the 15th.

  • Virginian||

    How much total do you think goes to the government? 50%? Higher?

    Pretty sure feudal serfs had to kick one of every three to their lord.

  • Scarecrow Repair||

    Couple of years ago, I made a rough calculation of all federal, state, and local budgets, and concluded the total is around $5B, which is in accord with the April 21 Tax Freedom date, if GDP is $17B.

    That does include Federal borrowing, so it's not stricly taxes paid. But it's a good first approximation.

  • Scarecrow Repair||

    Some details.... Federal budget, 3.8T. California budget, 155B, and if California has 1/8 the US population (38M / 313M), and one of the highest tax rates, that's probably 1.0T for all states. New York City budget is $70B (!) which surely is higher per capita than most everywhere else, and its population of 8M is 1/40 the US population, so probably $2T for all cities, max.

    That's a total of 6.8T, a lot higher than my older 5.0T estimate. It doesn't count counties and all the other myriad local mosquito abatement districts, but I'm sure that city estimate is way off. On the other hand, it's a lot closer to the 40-50% which seems typical for developed countries.

  • Thomas O.||

    "Limit government's reach?" Don't make me laugh.

    Absence of tax revenue isn't gonna limit government at all, as long as they don't believe in a national credit limit.

  • Christophe||

    They can only borrow as long as others are willing to lend.

    Others are willing to lend only because american tax cattle is so damn reliable and juicy.

  • Freedom Frog||

    Just tried to file my taxes on Turbo Tax. Was looking at just under $2k back. Nice.

    After I hit Send or File I was informed that someone else already filed with my SS#. Awesome.

  • PapayaSF||

    Oh-oh.

  • BigT||

    Frog, log back into TurboTax and look at the return that was filed. Maybe you accidentally filed when you meant to log out on a previous visit. In any case you want to know what's been done and report it ASAP - preferably by registered mail.

  • Freedom Frog||

    I spoke to someone there and they have a different name for my SS#. It was filed earlier in the year.

    So does this mean I can just let this guy or girl file taxes on my number and I won't have to anymore, lol?

  • Freedom Frog||

    And of course they can't tell me the name that's being used.

  • politicsbyothermeans||

    I had this exact thing happen to me. You're looking at about a two year process and you will not even have the joy of seeing the cocksucker in prison when it's all done.

    My sympathy!

  • Hayeksplosives||

    The lack of justice part does suck. I did a little research and found that a ton of this tax refund fraud originates from prisons! Still, I don't get how they cant catch the accomplices. You need an address or bank account to steal the refund...?

  • Hayeksplosives||

    Happened to me last year. The IRS gives conflicting instructions but here is what I did. File form 14039 (id theft affidavit) with your printed return. Don't efile this year. They say they will resolve it in 6 months. Mine took 30 days, presumeably because ive lived at the same place and worked the same job for years. They never even called me, just sent the real refund in a month.

    Then later they sent me a letter with a special number to file my 2013 taxes instead of using ssn. So I did that this year with turbotax and it was no problem.

    I used a copy of my affidavit of id theft to put a fraud alert on my credit file and everything has been fine since.

    Good luck!

  • PapayaSF||

    Jonathan Cohn needs to have WHAT IS SEEN AND WHAT IS NOT SEEN tattooed on his forehead, backwards, so that he reads it in the mirror every day.

  • fish_remote||

    Jonathan Cohn needs to set afire.....it's cool he's got Obamacare.

  • craiginmass||

    This is truly fine.

    Tell people to stop paying up...and then cry at the sorry state of our country.

    It can only make sense in a backwards/bizarro world. Please don't teach your kids this stuff.

  • NotAnotherSkippy||

    Funny, we pay more and more taxes and only go deeper and deeper in debt. Tell me again what is bizarro and backwards...

    Dumbass.

  • DenverJay||

    You know what, Masshat? I payed my taxes faithfully for decades, as part of the "social contract". Then my government decided that they no longer had to keep their end of the deal. They have shredded the Constitution and the Bill of Rights, and engaged in almost every single behavior that the Founding Fathers accused the King of England of engaging in when they wrote the Declaration of Independence.
    So, I accept that we now have an illegal government, and that there is not much that I can do about it. But I will be damned if I am going to pay for their assault on my freedom as well.

  • DenverJay||

    err... "paid"

  • jerryab||

    Eliminate ALL fees and taxes paid by people with an income of $250k/yr or less. How could it fail? "Tax cuts pay for themselves"--so what is the problem?

  • Vampire||

    craiginmass|"And a big middle finger to our Vets, Service Folks and millions more!
    Thanks!"

    I'm a veteran, and I applaud big T. Would you happen to be one of those folks who advocate we run rough shod around the world intervening In everyone's business, and starting wars while sitting home shielded from facing the consequences that those of us who serve must face on your, and the politicians behalf?

    Do you also spout freedom and liberty, while being completely oblivious to what the definitions of those rights are, and what is required to secure them? My brothers and sisters wouldn't need all of this care if it weren't for folks sending us off to fight wars, and meddle in the affairs of other nations. You must say "we're fighting to protect freedom" while ignoring the blatant loss of it through things like the patriot act, and violations of liberty that have been taking place for many years. The constitution was "supposed to" protect liberty, and those politicians swore an oath to do so. They are incapable of protecting liberty, as only free individuals can do so.

    My brothers and sisters have volunteered to fight for many years, and would do so in absence of government. We would then be able to defend liberty against aggression, instead of fighting wars for the benefit of politicians and defense contractors. For it is those of us that fight who strive for peace, and we know the horrors of what war brings.

  • Duelles||

    I really like the study of prostitutes in Brazil for which our tax money paid . . .or whatever the screwy study was. The basic needs can be met with much less spending and taxing Jon Con is obfuscating and not giving the whole truth to his readers. We know this to be true !
    As long as dollar bills are legal tender for all debts public and private, let's use cash.

GET REASON MAGAZINE

Get Reason's print or digital edition before it’s posted online

  • Video Game Nation: How gaming is making America freer – and more fun.
  • Matt Welch: How the left turned against free speech.
  • Nothing Left to Cut? Congress can’t live within their means.
  • And much more.

SUBSCRIBE

advertisement