Bernie Sanders

Poor Americans Will Be Stuck With the Tab for Bernie Sanders' Generous Promises

Successful people aren't just skilled at making money, they're unequaled at keeping it, too.


Self-described socialist presidential hopeful Bernie Sanders wants to fund generous promises of cool stuff for everybody with equally impressive taxes that would soak… everybody. Increasing the size of the federal government by upwards of 50 percent doesn't come cheap—the Tax Policy Center estimates that Sanders' proposed tax hikes would cost $15.3 trillion over the first decade "thereby lowering average after-tax income by 12.4 percent." As befits a socialist, Sanders intends to soak the rich, and indeed he tries to hit them harder than he slams the rest of the population. The Tax Policy Center finds that "All income groups would pay some additional tax, but most would come from high-income households."

But researchers find that people who are more likely to succeed economically are also more likely to dodge taxes. And targeting them specifically increases the likelihood that they'll hide their money from the authorities. No matter what he intends, Sanders' proposed tax hike looks destined to fall most heavily on those who can least afford to pay the tab for his promised goodies.

Just by hiking taxes at all, Sanders and others who favor an expansive state face an uphill battle. "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," writes Friedrich Schneider, a professor at Johannes Kepler University in Linz, Austria, and expert on tax evasion and off-books economics. By "shadow economy," he refers to work and business conducted out of reach of tax collectors and regulators.

That shadow economy can be a pretty roomy place in which to go about your life, too. The Internal Revenue Service currently estimates that Americans pay 83.1 percent of all taxes owed. That may sound low, but it's actually about the highest level of compliance in the world (researchers found the rate in Britain closer to 78 percent, and 68 percent in Germany). Hiking taxes could be expected to drive more Americans to get creative with their tax returns.

But who would be most likely to keep their cash out of the government's grasping mitts? "[I]ndividuals who demonstrate high levels of ability or effort, who typically are rich, are much less likely than others to comply with taxation," says Raymond Duch, Director of the Nuffield Centre for Experimental Social Sciences (CESS) at Oxford University.

Those greedy bastards! Of course they want to hold on to their moolah! You can already hear progressive pundits warming up their sharing-is-caring op-ed generators.

But Duch's research doesn't find that becoming rich makes people sticky-fingered. Instead, it seems that the same talent and drive that cause people to strive and succeed also make them proprietary about their earnings. "A causal mechanism contributing to tax cheating appears to be ability as opposed to wealth per se." By ability, Duch means exactly the sort of people you would expect to thrive by their own efforts: "very competitive individuals, successful entrepreneurs or investment bankers, or those who are very successful in the entertainment and the sports world."

There's no trigger level of taxation either—no magic threshold that sets off the talented and ambitious. People seem to resist handing over their money to the taxman no matter the burden. "The  higher  levels  of  cheating  by  able  versus  less  able  types  persists  in  high and low tax regimes."

Higher tax rates are a spur to resistance according to Schneider and company. But that non-compliance is bound to be more pronounced among those with the sort of ability that drives them to be prosperous, as found by Duch and his fellow researcher, Hector Solaz of the University of Birmingham.

So… put the screws to the rich, talented bastards, right? If we know that we're going to resist, the only solution is to hit them harder!

But that leads to even more trouble. In a separate paper, Duch and Pablo Beramendi of Duke University tried to discover what sorts of tax systems lead to higher compliance, and which ones inspire revolts. What they found is that "[m]ore progressivity leads to less compliance."

But that effect isn't across the board. In fact, "when taxes are high, rising levels of progressivity and redistribution reduces the rates of tax cheating." But that compliance "is largely driven by the behaviour of the poor… For the rich, on the other hand, higher progressivity in the high burden tax treatment reduces their tax compliance."

The simple act of targeting high-income taxpayers leads them to fight back.

Ultimately, this means that the cost of paying for generous programs will disproportionately fall on lower-income people, because they're less likely to evade the taxes intended to fund them.

Interestingly, Sanders has frequently held up Denmark's welfare state, with its necessarily high taxes, as a model to emulate. But a 2013 study found that in that country "about half the population purchases shadow work. In some sectors—such as construction—about half the workforce is working in the shadow economy." Unsurprisingly, Danes have been rethinking whether the expensive programs for which they've been skating on the bill are affordable.

At the end of the day, grandiose promises of massive government programs are cheap. But paying for them has a high price tag—and it will be shouldered by those with the fewest means to afford the cost.