Tuesday, November 3, 2020

Robert Frank Editorial on Decline in Enforcement Resources and Tax Evasion (11/3/20)

Noted economist Robert H. Frank (Wikipedia here) has written an excellent NYT op-ed: Without More Enforcement, Tax Evasion Will Spread Like a Virus (NYT 10/30/20), here.  Excerpts

Few people enjoy paying taxes, but as Oliver Wendell Holmes Jr. reminded us, “Taxes are what we pay for civilized society.” On reflection, most of us therefore offer at least implicit support for penalties against tax evasion — penalties that have little meaning unless backed by significant enforcement resources.

Yet prodded mainly by anti-tax Republicans, Congress has cut the Internal Revenue Service budget steadily since 2011. By 2019, the agency was auditing only one in every 222 individual returns, down from one in 90 in 2011. Similar reductions have occurred for corporate returns, and were proportionately larger for the wealthiest individuals and largest corporations.

These cuts have not saved the government money. The former I.R.S. commissioner John A. Koskinen estimated, for example, that every $1 trimmed from the agency’s budget has resulted in $4 in lost revenue. But this estimate refers only to direct, or first-round, losses. Because the extent to which people comply with tax laws depends strongly on the behavior of others around them, the ultimate revenue losses are certain to be much larger.

* * * *

What the reductions in I.R.S. funding will continue to unleash, then, is a characteristic feature of all behavioral contagion processes: an explosive chain of feedback loops that greatly amplify any initial change in behavior.

The United States was once firmly a member of the small group of countries whose high levels of tax compliance helped sustain the infrastructure investments needed to support broad economic and social prosperity. In a 2004 study that ranked 30 industrial countries and territories on a six-point tax-compliance scale, for example, it was in seventh place with a score of 4.47. Highest on the list was Singapore at 5.05, followed by New Zealand (5.00), Australia (4.58), Britain (4.67), Hong Kong (4.56) and Switzerland (4.49). Last among the 30 was Italy, with a score of 1.77.

Since that study was published, reduced I.R.S. funding has led to significant reductions in tax compliance in the United States, the Treasury Department reports. But these reductions are only the beginning. It takes time for people realize the extent to which others are evading taxes. And once that happens, compliance will fall much more rapidly.

JAT Comment:


This blog is cross-posted on my Federal Tax Procedure blog, here.

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