Tax Evasion Puzzler

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The New York Sun

So here’s a question for a rainy weekend: If the government cuts down on tax evasion — as 51 governments have just agreed to do — are your taxes more likely to go up or down? We were prompted to ponder this puzzle by the latest post of one our favorite writers on the Web, Donald Boudreaux of cafehayek.com. He’s a professor of economics at George Mason University and a genius at expressing economic issues in plain language using correct grammar.

His overnight email was ignited by a dispatch in the Washington Post that quoted the British chancellor, George Osborne, as approving the latest plot among governments to reduce what they characterize as tax evasion. The Right Honorable Mr. Osbourne tries to palm off on the long-suffering public the idea that the treaty “strikes a blow on behalf of hard-working taxpayers.” Professor Boudreaux says “no so fast.” He reckons the measure protects not taxpayers but tax collectors.

Consider, Mr. Boudreaux suggests, the actual experience in America. “In 31 of the 67 post-war years from 1946 to 2013, Uncle Sam’s budget deficit rose (or budget surplus shrunk) when his tax receipts increased.” In other words, “Uncle Sam almost as often as not responds to each dollar of additional tax revenue by increasing his spending by more than a dollar — thus imposing a heavier tax burden on future taxpayers.” Let us just pause to remark that this is a profound point.

Mr. Boudreaux, being nothing if not careful and honest, goes on to say that this confluence of facts “doesn’t prove that governments’ are institutionally prone to treat a rise in tax receipts as an invitation to hike spending excessively rather than to lower the tax burden on non-evaders.” But, he said, “it should give serious pause to those who blithely assume that more revenue extracted from tax evaders will necessarily reduce the burden of taxes borne by non-evaders.”

In a letter to the Washington Post, he refers to a 1997 essay in the publication “The Freeman.” That essay was called “Confessions of a Complaint Taxpayer.” Its author, Dwight Lee, confessed to being, like a lot of us, the type who, for fear of the IRS, always paid at least what he owed “and probably more.” But, Mr. Lee wrote, “If the government required only a fixed amount of money each year, we could hope to reduce the federal deficit by increasing tax revenues.”

“Unfortunately,” Mr. Lee goes on, “the federal government spends more than a dollar for every dollar it gets.” So “if some of my fellow taxpayers pay more taxes than required, my taxes are not reduced. Quite the opposite. The government would respond to the additional money by committing to new spending that will grow faster than anticipated, with yet more money and larger deficits being required, and I end up with a larger tax burden. Conversely, if some taxpayers underpay, my taxes will be lower, not higher, than they otherwise would be.”

The reason we fix on this point is not that we favor illegally evading taxes (we don’t). It’s that our government is coming to a juncture that could — particularly if the Republicans win control of the Senate — put taxing questions to the fore. This will start with the budget and debt ceiling debates in the Congress. If the Europeans keep on like they are, it could also get into treaty questions. America is not a party to the new pact, but it depends on American legislation.

A rising contingent on the left, meantime, is using the Fourth Amendment to fight against national security searches. Is it possible to imagine that they also might use Fourth Amendment principles to fight fiscal over-reach? We don’t know. But we do know that whatever debate erupts on the fiscal and monetary front, the kinds of points that Professor Boudreaux makes in respect of the latest tax agreement will be at a premium. The point of collecting taxes ought to be that our need for further taxation is reduced rather than increased.


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