ataxingmatter

Tax Home--where the heart is, but not necessarily where the taxes are lowest

Presumably we all learn as kids that we can't hoard and save our favorite delicacy and enjoy it at the same time.  "You can't eat your cake and have it, too."  It's one of those hard life lessons that once learned, serves us well throughout the rest of our lives.

Apparently, not everybody learns it.  Joe Kristan on Roth & Company's blog (rothcpa.com) gives a good review of a typical tax case involving an attempt to do just that--keep your home where your family is, but claim a (tax-advantaged) home where your job and convenient apartment for weekdays is located.  The case is  Schmitz vs. Iowa Department of Revenue, Court of Appeals of Iowa No. 2-583.  The blog post is: Joe Kristan, Home is where the heart is.  And the house, wife, kids, cars... , Rothcpa.com (Sept. 20, 2012). 

A few excerpts from Joe's post will give you the gist of this executive's claim of a South Dakota (low tax state) instead of Iowa (higher tax state, family home) for income tax purposes.  It was a no-go.

An executive got transferred from his employer’s Iowa office to Dakota Dunes, South Dakota.  His wife balked at the move, so he rented an apartment in South Dakota and came home on weekends.  Noting the difference between the income tax rates in South Dakota (0%) and Iowa (8.98%), he chose to file as a South Dakota resident.

* * *

It may possible to have a domicile in a different state than your spouse — like former power couple Arnold Schwarzenegger and Maria Shriver.  But it isn’t easy, and you can’t take shortcuts if you try.  An Iowa appeals court yesterday said the taxpayer didn’t try hard enough.

The executive, it appears, had kept bank account, drivers license, voter registration, five family cars, "vanity plates" on his own car--all in Iowa.  He had an apartment in South Dakota where his new job was, but he didn't stay there on weekends.  And perhaps the most glaringly wrong thing to do--he filed for a homestead property tax credit on his Iowa home, for which he had to declare Iowa his residence for tax purposes!  Yet he tried to avoid filing Iowa income tax returns, under the claim that he was a South Dakota resident.  Needless to say, he was unsuccessful:  the Iowa court determined that he owed more than $290 thousand in Iowa taxes, penalties and interest.

Links Worth Noting: Thoma, Maule, Smith

Mark Thoma, Economist's View, EPI: STate and Local Public Employees Undercompensated, Sept. 15, 2010

Part of the rhetoric that has been circulating these days about the need to "starve the beast", even at local and state government levels, is a view that we are wasting money on overpaid public employees, especially their pension plans and health benefits.  Spewed hatefully on the Washington Post's comment site I've seen statements that every problem can be solved by cutting taxes to 15% for everybody (or taxing only "uses") and then cutting public employees' benefit to nothing since they are overpaid.    The anti-government venom is clearly irrational and not based on any understanding of how government works, what life would be like without those state employees, or how hard most public employees work for their lower pay.    [Disclosure--I am a state employee with a decent pension plan and decent health benefits.]

Of course, it is true that many states have underfunded their pension plans for their public employees.  But this does not mean that the employees are overpaid or the goals for the pension plan funding were too high.  It merely means that states have done what many imprudent individuals do--spent the money on something else rather than set it aside to meet the obligations that the state committed to with respect to its employees. 

The Economic Policy INstitute finds that public employees at the state and local level are undercompensated compared to their peers in private employment, including the promised benefits (which, of course, some may not receive because of the push by the right to cut public pensions).

To quote the post: "The report, Debunking the Myth of the Overcompensated Public Employee: The Evidence by Labor and Employment Relations Professor Jeffrey Keefe of Rutgers University, finds that, on average, state and local government workers are compensated 3.75% less than workers in the private sector. "

James Maule, The Consequences of Tax Education Deficiency, Mauled Again, Sept. 15, 2010.

My fellow tax professor Jim Maule hits on a topic that is dear to my heart--the staggering amount of misinformation about tax that is circulated in the blogosphere, newspapers, radio shows, and television "news" commentary.  He suggests much of it is intentional misinformation that is disseminated in an atempt to fool people in supporting positions that they would not support if they were fully--and accurately--informed.  Here's his final paragraphs:--I think the answer to the question of "who benefits" must be the people whose policies are furthered by the misinformation, and no one else.

It is easy to figure out why the purveyors of tax nonsense do so. Political gain means more than does truth, honesty, or integrity. It’s not stupidity or laziness on their part. They know the facts, and they consciously twist the information because the twisted material has positive value for their agenda whereas accurate information will wipe out any realistic chance for political success. It also is easy, for me, to determine why the dissemination of tax nonsense works. As I pointed out in Tax Education Is Not Just for Tax Professionals:

It’s obvious that too few Americans understand enough about tax law or finances. It’s also obvious that one of the reasons is that insufficient funds are provided to educate the nation’s children about these things as they move through its school systems. . . . . If the nation continues to resist paying for quality education of its children, it will soon become a nation of the ignorant.

Who benefits when the country is a nation of the ignorant? The answer to that question explains much more than what fits in a four-paragraph blog post.

Yves Smith, Why do we keep indulging the fiction that banks are private enterprises, Naked Capitalism, Sept. 15, 2010.

Yves notes the problem that the Dodd-Frank bill doesn't do enough to head off another financial crisis (as I've said here before, banks remain too big to fail, banks are still permitted to own hedge funds and private equity funds, with some restrictions that don't amount to enough, and banks continue proprietary trading under the guise of customer preparation and derivatives transactions--well, naked credit default swaps are still possible).  So we are hoping for an assist from Basel III, the revision of the internationally agreed regime for regulating banks.

But Basel III doesn't go far enough either.  It's a weakling when a giant was needed, though the banks as usual will pile on with whining about how these new rules will cripple their profitability and hence restrict lending and hence doom the global economy.  As Wolf (the criticizer of the Basel rules linked by Yves) notes, tripling the size of required capital reserves "sounds tough, but only if one fails to realise that tripling almost nothing does not give one very much."  Besides the delays in our own bank reforms (years for the banks to speculate themselves into another crisis, the Basel III reforms won't be fully implemented for another decade, plenty of time for "another crisis or two."

Here's a great paragraph from Wulf (with highlighting by Yves).

We cannot assess the costs of regulation without recognising a few facts: first, both the economy and the financial system have just survived a near death experience; second, the costs of the crisis include millions of unemployed and tens of trillions of dollars in lost output, as the Bank of England’s Andy Haldane has argued; third, governments rescued the financial system by socialising its risks; finally, the financial industry is the only one with limitless access to the public purse and is, as a result, by far the most subsidised in the world.

You should read the full post to see what Yves does with the highlighted phrase, but here's a sample.

The usual narrative, “privatized gains and socialized losses” is insufficient to describe the dynamic at work. The banking industry falsely depicts markets, and by extension, its incumbents as a bastion of capitalism. The blatant manipulations of the equity markets shows that financial activity, which used to be recognized as valuable because it supported commercial activity, is whenever possible being subverted to industry rent-seeking. And worse, these activities are state supported.

***

So, the reality is that banks can no longer meaningfully be called private enterprises, yet no one in the media will challenge this fiction. And pointing out in a more direct manner that banks should not be considered capitalist ventures would also penetrate the dubious defenses of their need for lavish pay. Why should government-backed businesses run hedge funds or engage in high risk trading, or for that matter, be permitted to offer lucrative products that are valuable because they allow customers to engage in questionable activities, like regulatory arbitrage? The sort of markets that serve a public purpose should be reasonably efficient and transparent, which implies low margins for intermediaries.

Say it ain't so, Uncle Sam--predatory refund anticipation loans and the IRS

What makes it worse is that the IRS facilitates the ability of these tax return preparation companies (like H&R Block) to make these predatory loans with almost no risk whatsoever that they won't get their money back, since it permits a return preparer company to share private information acquired in the preparation of the return with its lending affiliate for just this purpose. 

For more on this, see Alternet's story by Alexander Zaitchik, How the IRS Helps H&R Block Scam Taxpayers, Mar. 17, 2010.  Alternet says it's time for these companies to quit this predatory behavior.  I agree, don't you?  And the rules should be changed to deny these lending companies the ability to access the taxpayer's private information for purposes of their assessment of risks.

Link worth noting: Wall St.Journal and Golf Carts

Tax Prof noted the Wall Street Journal editorial titled "Cash for Clubbers" (Oct. 17, 2009), which suggests that "thanks to President Obama's stimulus plan", the government is now "paying Americans" to buy golf carts.  The Journal notes that golf cart dealerships are enticing people in with the credit (which only applies to certain road-worthy carts) and that this "golf-cart fiasco perfectly illustrates tax policy in the age of Obama" when "politicians dole out credits" and "Democrats then insist that to pay for these absurdities they have no choice but to raise tax rates on other things."

The Journal is playing somewhat fast and loose with the credit and with who is responsible.  As to responsibility, it was passed before Obama tood office, so surely it cannot "perfectly illustrate" Obama's policy.  And the "politicians [who] dole out credits" have been members of the GOP during its majority control, because they argue for tax cuts of all kinds, including credits that are clearly unnecessary (the R&D credit, for example, that I think the Wall St. Journal has defended as one of those "extension" provisions that it claims is vital to competitiveness).  The Republicans passed many of these boondoggle loopholes during the time they had control between Reagan and Bush with the underlying premise that tax cuts generate more tax revenues, while at the same time they had to raise the debt limit so that the government could borrow money to fund the tax cuts and the deficit grew by unprecedented amounts.   While the Democrats have been far from perfect on these matters (e.g., including many more tax provisions than I think they should have in the stimulus bill, compared to direct spending on good projects in the public interest), at the same time Democrats have, to their credit, at least acknowledged that there is a cost to doling out credits--that tax cuts do not magically deliver more money instead of less and that we likely will need some tax increases after this long gorging on tax cut after tax cut that hasn't delivered either new jogs or high government revenues.

Tax Prof has a well thought out piece by Sue Altmeyer on the Journal piece.  She notes that the IRS ruling that golf carts may qualify if they are street-legal dates to 2000 (put out in the early months, that is, of the George W. Bush administration by the business friendly Bush IRS).  Similarly, the credit (section 30D) was enacted in 2008 (and doesn't permit the vehicle to be bought for resale, thus undoing the scheme discussed in the Journal whereby a Floridian self-styled "the Golf Cart Man" promises a special boon by combining purchases with his repurchases.  Further, she notes that Notice 2009-54 (that's under Obama) states that the motor vehicles covered are supposed to be manufactured for primarily street use.  And that notice also suggests that you should make sure that the credit being advertised by golf cart salesmen really applies by asking them for an IRS acknowledgement.  The 2009 stimulus bill did make some changes (at whose urging?).

Hat tip to Tax Prof and thanks to Sue Altmeyer for a cogent piece.

Kornhauser's Tax Literacy Project--about time.....

One of my big gripes (in case you haven't noticed) is the ease with which ordinary Americans can be fooled about tax issues by organizations, often ones with greedy purposes of furthering their own interests in lower taxes for themselves, that publish misleading or downright untruthful information and just keep repeating it.  This has been a special problem with estate taxes, which hit only the very wealthiest amongst us and for a relatively small amount even for the large estates.  It is also true of income taxes in general, the way flat taxes would work, the rationales for the corporate tax and many other key tax policies.  Lobbyists frame the issues with inflamatory language, and most are too unknowing about the way tax really works to recognize the ruse for what it is. 

Some of the worst phrases that have furthered the cause of cutting taxes for the wealthy so that the majority of Americans can either pay higher taxes themselves or do without the kinds of things that governments, not private enterprises, do best  are "death taxes" and "double taxation" . 

Much of the estate that is taxed when a decendent passes it along to his heirs as an unearned windfall has never been taxed at all during the decedent's lifetime, in the case of wealthy people with mostly financial assets.  If there is not a good sized bite out of the estate upon the transfer to beneficiaries, there'll be very little contribution to taxes from an agglomerate of wealth that has benefited enormously from the US legal system.  And the heirs won't have any taxes to pay either--they'll just keep holding and will have a stepped up basis when they sell.  All that is is a system for perpetuating or creating oligarchy--letting the wealthy become a ruling class with all the money and all the power without contributing anything much to help pay for the system that made all the wealth possible in the first place.

Similarly, the phrase "double taxation" is used to make people think that taxing corporations is unfair.  But the decision about whether we tax entities or not is a reasonable one for societies to make.  We made it a long time ago--deciding that we should treat corporations as taxpayers and we should tax capitalist owners of corporations on the income they are paid out of their corporate ownership as well.  It is one of the most progressive parts of the federal income tax, and it makes a lot of sense from a democratic egalitarianism perspective.  Corporations can horde money and have enormous power because of their ability to lobby for their own benefit.  Look at the way Big Pharm and Big INsurance has gotten Max Baucus in their pocket--putting money in his, and getting out of that a watered down health bill that doesn't do half of what we should be doing to move towards a single payer, single provider system like the most advanced countries already have.  The presupposition behind the term "double tax" is that you are overtaxing and that you are taxing somebody that shouldn't be taxed.  Since Reagan, there has been a huge push by the same economic thinkers that brought us our current Great REcession to undo the US classical corporate tax system.  It's really a push for giving more money back to the wealthy and cutting the size of government.  But it's all done in the name of economic efficiency--a theory without basis in reality that is probably more to blame for the greed that dominates today's society and the consolidation of huge megafirms--Big Pharm, Big Oil, Big Banks, Big multinationals in general--than anything else. 

So I'm glad to see Marjorie Kornhauser's project take off.  Maybe others won't agree with me on these pet peeves, but if we have better educated citizens who have more basic knowledge about taxes and how they work, it won't be so easy to bamboozle them into voting against their interest to support tax cuts for the wealthy and service cuts for everybody else while the boondoggles for the big corporations just keep pouring out (like an agreement that the government can't use its bargaining power to get cheaper drugs, or that Big Pharm can prevent generics being sold for 12 years and other crap that is getting put into the "health reform" bill that is becoming, like so much else these days, a corporate giveaway).

What's her project?  It's called The Tax Literacy Project--"a non-partisan effort to informally educate the public about taxes through popular methods such as web-based games and other internet activities.

Want to help?  Donations are being accepted.  What follows is the appeal, direct from Kornhauser and the ASU Foundation.

Money from Taxes Helps Every Person Every Day!

But polls show most of us do not understand anything about our taxes.

Why should we bother learning about taxes? Because:

Tax ignorance costs each of us money. Many of us pay more tax than we actually owe. Because tax ignorance makes it hard to discuss and enact sound tax policies, we are not able to raise money in the fairest and most efficient manner possible.

Why do we need taxes?

Taxes support democracy. They fund government services and goods such as court systems and national defense that protect your life, your property, and your constitutional rights.

Taxes support economic growth. Governments use taxes to encourage economic growth in numerous ways such as maintaining a stable currency, enacting and enforcing laws that protect both workers and employers (their life and property), and helping to build and maintain large and dependable energy, transportation and communication systems.

Taxes support your daily quality of life. They help you and your family buy a house, breathe clean air, have safe food and drugs, travel safely and efficiently on highways, trains, and planes. Taxes help pay for your health care (in the form of tax benefits or direct care) and they pay to educate you and your family. Taxes help you at work (e.g. enforce contracts, provide safe workplace) and help you at play (e.g. national parks).

Become part of a solution to the problem of tax ignorance by contributing to the Tax Literacy Project.

What is the Tax Literacy Project?

It is a non-partisan effort to informally educate the public about taxes through popular methods such as web-based games and other internet activities.

Can you support the Tax Literacy Project regardless of your political outlook?

Yes, the Project’s only purpose is to help provide information about tax, not to support any particular type or amount of taxes. No matter what kind of government people want, that government will cost money. Americans must understand how that money can be fairly and efficiently raised.

How can you make a charitable contribution?

Make your donation payable to the Tax Literacy Fund at https://secure.asufoundation.org/giving/online-gift.asp?fid=418 (no appeal code necessary) or Make your check payable to the  ASU Foundation and mail to the Sandra Day O’Connor  College of Law, Arizona State University, PO Box 877906, Tempe, AZ 85287-7906.  Please write Tax Literacy Fund (30004788) in the memo line of your check. 

Thank you in advance for your interest and support.

For more information or to become involved, please contact the Project Director: Marjorie E. Kornhauser, Professor of Law Sandra Day O’Connor College of Law, Arizona State University

[email protected] 480.965.0396

All funds will be deposited with the ASU Foundation, a separate non-profit organization that exists to support ASU. Your payment may be considered a charitable contribution. Please consult your tax advisor regarding the deductibility of charitable contributions.

 

 

Jim Repetti's work on wealth, taxes, and Democracy

One of the truly great advantages of serving as a visiting professor at another institution is the chance to become better acquainted with tax colleagues.  I'm blessed here at Boston College with a wonderful group of colleagues, not least of which is Jim Repetti.

Jim wrote an important article in 2001 about the negative impact of wealth concentration.  He concluded that a reasonable estate tax is an important institution to sustain democracy.  The article, titled "Democracies, Taxes and Wealth" is available at this link on SSRN.  Here's the abstract. 

This article demonstrates why wealth concentration matters and why the tax system should be used to help control wealth concentration. It shows that wealth concentration appears to be related to slow economic growth because of the lack of opportunities. It also shows that wealth concentration adversely affects the democratic process. It argues that because inheritances represent approximately fifty percent of wealth, wealth transfers should be taxed so long as the tax provides benefits that outweigh any assoiated harms. Using the current estate tax as a case study, the article concludes that a wealth transfer tax raises significant revenues and helps curb upward spiralling wealth concentration. Moreover, contrary to what has commonly been asserted, empirical studies generally show that the tax does not discourage savings.

Readers will no doubt recognize a good bit of similarity with this blogger's thoughts on this issue.  I wish we could get Senator Baucus and the other members of Congress who are so intent on eviscerating the estate tax in favor of the ultra-wealthy (who are the only ones who bear it at this point anyway) to read this and pay attention.

This year, Jim has developed his theory about the importance of proper tax theory to democracy even further, in Democracy and Opportunity: A New Paradigm in Tax Equity, 61 Vanderbilt L. Rev. (forthcoming 2008). This is a wonderful article that reconsiders much of prior thinking about fairness in tax (and does not slight efficiency, either).  What it accomplishes is a clear grounding of tax fairness in the democratic institution that our tax system is intended to support.  Here's how Jim describes his approach.

Tax policy has ignored the necessity of first identifying equity goals appropriate for a just government and then designing a tax system to help achieve those goals. This article proposes that the principal equity goal underlying a just government is the creation of equal opportunities for all citizens to achieve self realization, i.e. to maximize their potential. However, a tax system should not merely be evaluated for its contribution to achieving equal opportunity for self realization. A tax should be designed to achieve equal opportunity for self realization as one of its principal goals. Viewing equal opportunity for self realization as a design issue leads to the identification of another principle that is foundational—the promotion of democracy. Both political philosophy and empirical literature suggest that equal access to the electoral process and participation in the community must exist in order for equal opportunity for self realization to exist. Thus, the turtle lying at the bottom is equality of opportunity—equality of opportunity to maximize self realization and equality of opportunity to participate in the political process.

He then methodically sets about establishing that having this goal as a foundational concept for the design of a tax system incorporates much of the understanding that was achieved by defining equity in terms of benefits received or ability to pay, while providing a fully reasoned concept of fairness that can guide the choice of appropriate base and rate structure for the tax system.  Along the way, he dispels some of the myths about consumption taxation that have been put forward as "consensus" views of tax academics (even though there is no clear consensus within academe that consumption taxation is preferred over income taxation).  Again, Jim's own words in describing the relative advantages of an income over a consumption tax system are insightful.

To illustrate the importance of designing a tax system based upon these principles of equity, this article revisits the debate about the desirability of an income tax versus a consumption tax. It is well understood that in the short-run democracy is an inefficient form of government, but that in the long-run it is the most successful. The same is true for an income tax. Advocates of a consumption tax assert that investment income should not be taxed in order to maximize efficiency. However, an income tax that burdens investment income makes contributions to the effective operation of our democracy and to the creation of equal opportunity that are far more important than any efficiency gains provided by a consumption tax. Indeed, as discussed in this article, the relative efficiencies of the two types of tax systems, while clear in an idealized world, are far less clear in the real world. A tax system designed to maximize opportunities for self realization and participation in democracy provides benefits that have previously been ignored in evaluating tax systems. In contrast, a consumption tax designed to deal with transition and distributive issues likely to arise in the real world may be no more efficient than the income tax it would replace.

I highly recommend this important article for all those who care about establishing a firm fairness rationale for the tax system that is grounded in concern for a sustainable democratic institution.

CBPP on Income Concentration

The Center on Budget and Policy Priorities has another interesting report today on income inequality in the United States.  See Aviva Aron-Dine, New Data Show Income Concentration Rose Again in 2006 (Mar. 27, 2008).  The report is based on the work of Thomas Piketty and Emmanuel Saez, who issued an updated version of their research on income inequality, based on new information from the IRS.  There are a couple of excellent graphs as well, worth looking at.  Key points include:

• 2006 was the fourth straight year of significant income gains at the very top and very small gains everywhere else:  from 2002-2006, the top 1% had average incomes rise by 44% or $335,0000.  The bottom 90% had incomes rise by 3%, or $1000.
• The share of the nation's income going to the top 1% hasn't been that high since just before the Great Depression.
• Those in the very top income distribution--the top one-tenth of 1 percent--had enormous income gains rising 60%, or $1.9 million per household, since 2002.
• The three decades of booming economic growth after WWII lifted everybody's boats--the incomes of the bottom 90% actually increased more rapidly, on average, than the incomes of the top 1 percent.
• But the three decades since then (from the mid seventies on) have seen the incomes of most Americans increase only a little, while the incomes of the top 1 percent have "soared"

Tax Info, anyone? Tax Policy Briefing Book

The Tax Policy Center (Brookings and Urban Institute) has a great project that is the brainchild of prolific author Len Burman--the Tax Policy Briefing Book (authors fully responsible, it notes for content, and not the institutes themselves).  This online resource has simple, factual explanations of various aspects of the tax system (e.g., the AMT, defined contribution or defined benefit retirement systems, capital gains) and will be updated online to stay current on proposals and ideas for tax reform. 

The posting on the capital gains tax, Capital Gains: What is the effect of a lower tax rate? is well worth a look.  It notes the historical trend of taxing capital gains at a lower rate than ordinary income and the arguments for doing so:  that lower tax on stock sales (i) offsets the taxes paid at the corporate level, mitigating the so-called double taxation"of corporate income; (ii) encourages entrepreneurs; (iii) offsets effect of inflation, and (iv) prevents the "lock-in" when people hold onto assets longer than economic efficiency suggests they should in order to avoid paying tax. 

It then notes some of arguments against the preferential rate.  Perhaps the most important is the disproportionate benefit to the wealthy.  The distributional effects of the capital gains preference, in a quite clear table showing cash income level, percent of returns getting a benefit and average tax savings.  Not surprisingly for anyone familiar with the distribution of capital assets in the US, tax returns with cash income of less than $100,000 show very little average savings from the capital gains preference--%68 for those making more than $75,000 and quickly down from there.  But for those making more than 200,000, the average 2007 savings is huge: $2082 for those in the 200-500 thousand range; and $149,315 for those who make more than $1 million in cash income (which of course is only a very small percentage of the returns filed.  The wealthy benefit disproportionately from the preference--92 percent of the benefit in 2007 went to taxpayers with income over $200,000 and 72% to those with more than $1 million.

Another argument is the encouragement of inefficient tax sheltering--trying to convert wage income to capital gains to save wealthy individuals 20 cents on the dollar of sheltered income.  The hedge fund managers with their carried interest provisions have been notoriously successful at this, and even now that Congress has become clearly aware of the problem, it has not acted.

And preferential capital gains rates are a major complication to the tax laws and regulations.

The article also takes on each of the arguments in favor of a capital gains preference and quickly destroys them.  Briefly:

• About half of capital gains are indeed on corporate stock, but only about half of those corporate profits have ever been taxed at the corporate level;
• capital gains assets are probably riskier than other assets, but the ability to deduct the losses evens out the requirement of paying tax on gains (and most losses are used very soon after realization);
• some of the gain is due to inflation, but that is also true for interest and other items that are taxed currently at ordinary rates; adjusting one but not the other for inflation creates tax shelter opportunities;
• at least one study suggests that the lock-in effect is very minimal, except around temporary tax changes;

The article suggests that if the US wants to provide some kind of preference (and it doesn't give much support for doing so), then a better way would be to exclude some portion of capital gains and tax the rest at ordinary rates. 

Thanks to Tax Prof for pointing out the new "Tax Policy Book."  This is a useful resource, especially for those who don't have a background in tax law because of its easy readibility and straightforward explanations.

Becker and Posner on Tax Evasion: A TaxProf discussion

Becker and Posner engage in an interesting discussion today of the economics of tax evasion on the TaxProf listserve, asking why there is such good compliance and not so much tax evasion as a rational homo economicus would suggest.  Becker, of course, was one of the first to apply  cost-benefit analysis to crimes.  I've always been rather dubious of those economic analyses, because it is so convenient to set the assumptions to produce the desired outcomes, and forget inconvenient externalities. In spite of my skepticism about the results of economic analysis, I find that it sets an interesting framework with which to approach an issue, that can shed interesting light on human behavior and critical factors in making policy decisions.

Becker concludes that audits, sanctions and other deterrence merits do affect compliance rates, but are not alone able to account for the fairly high compliance rates among advanced countries.  He concludes that it may well be that an exogenous factor is operating--a sense of moral duty to pay one's taxes.

Posner, predictably, disagrees with that conclusion.  He claims that there is more to deterrence than meets the eye, especially since information about the best ways to evade taxes is hard to come by for most people.  Adding the information costs to higher costs to evasion than Becker assumes--audits aren't random, once audited a future audit is more certain--means there is less of a gap than Becker considers.  But those arguments are only tinkering at the edges, which Posner essentially admits when he puts forth is third argument.  Here's the excerpt from his concluding argument.

Every dollar spent by the Internal Revenue Service on enforcement brings in several dollars in additional tax revenue, suggesting that an expansion in the IRS’s budget would be necessary to equate the marginal benefits of tax enforcement to its marginal costs. But this suggestion ignores the fact that the benefits are, as a first approximation, merely income transfers, whereas the marginal costs of tax enforcement are social costs. If taxes are evaded, the resulting shortfall in tax revenues is made up by increasing the tax rate, and there is no social loss unless the increase has worse misallocative effects than the evaded taxes would have had, had they not been evaded. One reason, therefore, that tax evasion is widespread is that it may be cheaper from an overall social standpoint to have slightly higher tax rates than to devote additional resources to law enforcement, though the first-best solution might be stiffer penalties, especially monetary penalties. Deliberately lax enforcement would then explain the amount of evasion.

Now, I find this last argument questionable for all sorts of reasons.  First and foremost, the idea that whenever tax revenues fall short because of tax evasion it is a simple matter to merely raise the rates and recoup the lost amounts, resulting in "no social loss" strikes me as absurd, in the US at least.  Raising rates is politically extraordinarily difficult, because right-wing groups (and their expensive lobbyists and think tanks) have pushed tax cuts as the panacea for all social, moral and economic problems for decades.  In fact, tax evasion plays into the right-wing agenda for starving the government "beast" of funds, resulting in the type of argument frequently made by Jim Saxton's reports for the Joint Economic Committee that evasion of a tax is a justification for eliminating the tax, not for squelching the evasion.  It is relatively easy to convince ordinary people that any tax increase--even one that has not realistic possibility of falling on them because it is targeted at high-income taxpayers--is a bad idea, since about 40% of the American electorate think they are in the top 5% of the income distribution.  And of course, the rhetoric has for so long been focused on labelling government as an "other" that is bad and privatization that puts public goods and public needs into private corporate hands as unambiguously good, making the possibility of raising rates to compensate for evasion even harder.

But are the benefits of tax enforcement merely "income transfers" while the costs of tax enforcement are clearly "social costs", as Posner claims?  I don't think so.  Tax enforcement has important institution-reinforcing value, as citizens are encouraged to think of themselves as citizens who participate together in government to provide for the common good in ways that each individually cannot do.  Good tax enforcement encourages those who do comply out of a sense of moral duty to continue to do so, while lax enforcement results in some feeling like they've been snookered into complying while others live high on the hog from their evasive gains. Since nobody likes to be played for a fool, lax enforcement and visible cheating  tend to weigh against the sense of duty to the democratic system and fellow participants.  In other words, there are social benefits from appropriate enforcement that go well beyond the mere income transfers that it achieves or even the good uses to which tax revenues are put, one of which is the reinforcement of the shared sense of moral duty to support the common good.

I think one of Posner's problems is that he looks through a very narrow window that sees the compliance/evasion issue--and even the question of moral duty--as a question of obey or disobey the law.  That misses the deeper and more profound concern that I think at least partially underlies our compliance with tax laws--the acceptance of a shared core set of values and institutional priorities.

Mercer's Worldwide Individual Tax Comparator Report

Mercer's Worldwide Individual Tax Comparator Report compares the after-tax take-home amount (considering "personal" and social security tax--apparently including state and federal income taxes for the US) for single, married without children and married with 2 children in 32 countries. 

One thing pops out in this report--it shows that the US tax system favors married taxpayers with children over single taxpayers, ranking 11 out of the 32 for married with children and tied with several at 14 out of 32 for singles.

The US is not the lowest tax rate country in the study but it is by no means the highest.  The United Arab Emirates, Hong Kong and Russia have the lowest tax, while European countries are at the highest rates.  For single taxpayers, the US tax rate as calculated in this study comes out at just slightly more than 29%, whereas most european countries have higher tax rates. (The UK is almost exactly the same as the US here.) For married taxpayers with two children, the US tax rate as calculated in this study comes out at just under 21%--only 11th from the bottom rate country which is the United Arab Emirates with 5%.

What this study shows, like so many others, is that our effective tax rates are actually quite low. Too low for our own good, perhaps, since we don't have the funds to pay for the government services that we provide and we don't provide services that many of our European friends take for granted, like universal health care.