wrote about the experience for Penthouse; and I started a little house-painting and handyman business off the books.Many years ago, I dropped out of law school. As wise a decision as fleeing from law school is at any time, it left me unemployed and debt-ridden in Boston in the midst of the recession of the early 1990s. Cut off from my cozy, if temporary, academic existence, and with my list of creditors rather lengthier than my list of potential employers, I did what any enterprising young man does in difficult economic times: I sold...umm...genetic material to the highest bidder in a city full of competing researchers; I worked as a paid medical guinea pig in a series of increasingly bizarre experiments involving both cocaine and marijuana, and
You want hard-wood floors stripped and refinished? I did that. You want firewood split? I did that. You want classic trim painted a different color than the walls? Yep. How about painting over ancient leather wallpaper that just drips character? I…refused that job. Come on, that's a piece of history on your wall. Crusty, cracking history.
I did it all for cash, of course. No checks, no credit cards, and certainly no taxes.
Of course, at my income level at that time, taxes would likely have meant the difference between protein and no protein in my diet in any given week. But I doubt that Uncle Sam would have cared much about my financial straits or my efforts to keep my head above water—he always wants his pound of flesh.
In fact, each tax season, as the U.S. federal government's ongoing spending spree grows ever-more clearly uncontrollable, politicians' proposals inevitably turn to collecting taxes owed under the law, but never paid. Closing the so-called "tax gap" is an easy sell to the public because it sounds like simple fairness.
Fueling politicians' appetite for tax dollars uncollected, "[t]he voluntary compliance rate—the percentage of total tax revenues paid on a timely basis—for tax year 2006 is estimated to be 83.1 percent,” according to a thrill-a-minute report released by the Internal Revenue Service in January of 2012. That compliance rate, or rather the corresponding noncompliance rate, resulted in a gross tax gap estimated at $450 billion dollars left beyond the grasp of the nation's gatherers of other people's money. Even after enforcement efforts, $385 billion is believed to have slipped away.
Those hundreds of billions of uncollected dollars have politicians salivating. What less provocative way could there be for funding the government's ever-growing wish list (or, maybe, reducing the debt just a tad) than by going after money that is owed under existing tax laws, but which is being hidden from the IRS? After all, it's about making people pay their fair share, isn't it?
But there's a difference between fever dreams of 100 percent compliance and the real world, and the fact is that no law ever achieves complete compliance. In fact, the IRS is already the envy of tax collectors around the world for the relatively large degree of cooperation it receives from the American people, resulting in a smaller tax gap than other nations could ever hope to achieve. And trying to collect the elusive billions that remain outside official reach would mean an escalating and doomed war by the government against the American people.
What do I mean?
First, you have to understand that the IRS is one of the few tax agencies to release its compliance figures. When you look at the numbers for other countries — painstakingly compiled by independent economists — the reason is clear.
In What Explains Tax Evasion: An Empirical Assessment Based on European Data, a paper prepared for the Vienna Institute for International Economic Studies, authors Edward Christie and Mario Holzner calculated tax compliance rates for European Union members and several candidate countries. A separate paper by Lars P. Feld and Bruno S. Frey, Tax Evasion in Switzerland: The Roles of Deterrence and Tax Morale, calculated Swiss income tax compliance.
In terms of personal income tax, the most recent compliance rates calculated in the paper are shown below. For the purposes of a more apples-to-apples comparison, I've used numbers only from more-developed Western European countries to compare to the U.S.:
Personal Income Tax Compliance Rates in
United Kingdom: 77.97%
United States: 83.10%
Is anything jumping out at you? How about the fact the U.S. tax compliance, at 83 percent, is higher than other countries have been able to manage?
This actually is no secret, no matter how much certain Americans like to pretend that Europe is a magical place where people eagerly cut checks to the tax man to pay for a grab-bag of social services. Italian President Silvio Berlusconi once described tax evasion as a “natural right,” reflecting the views of many of his countrymen. In practical terms, this likely puts Italy on the same footing as Belgium, where dodging taxes is widely described as the country's “national sport.”
In a November 2011 column, CNN's Tim Lister pointed out, “When [researchers] analyzed Europe's 'shadow economies' — defined as areas that fall beyond the reach of the taxman — those of Greece, Italy, Spain and Portugal were much larger (relatively) than those in northern Europe.
“Shadow economy” is an interesting measure. Where tax-compliance rates are often held as closely guarded secrets by somewhat embarrassed tax officials, and even when pried loose may obscure differences in measurement and tax laws, the size of the shadow economy can be calculated independently by economists and used as a handy apples-to-apples comparison.
Professor Friedrich Schneider of the University of Linz is a recognized expert in tracking unofficial economic activity. He defines the "shadow economy" as: