Today is Tax Day, the day by which
Americans’ tax returns must be postmarked or electronically
submitted in order to avoid the wrath of the shakedown artists at
the Internal Revenue Service. Mind you, that’s not the same as
Tax Freedom Day, the day on which Americans as a whole have
earned enough money to pay the year’s total tax bill—that’s April
21 in 2014, three days later than last year. But the bill due on
Tax Day isn’t high enough for some, nor is Tax Freedom Day late
enough in the year. Jonathan Cohn, of The New
Republic, thinks the U.S. government should follow the example
of other regimes that demand a bigger take from people’s labors and
that “a
bigger April 15 bill would mean a better society.”
What Cohn fails to mention is that tax-happy governments tend to
drive tax-averse people to hide in the shadows, concealing vast
shares of the economy from officials, and severely limiting the
reach of the state. If prople like Cohn really want to emulate
other country’s tax rates, he’ll have to take their off-the-books
economies, too—and the limits they impose on what the state can
actually take.
Cohn
writes in praise of all the good things he sees in a high tax
tab.
That payroll tax taken out of everybody’s check? It’s buying you
Medicare and Social Security, which means a more secure retirement
free of crippling medical bills. Your federal income tax? Its
effects are a lot more diffuse. But chances are pretty good that
you’ve already used some infrastructure today—whether it was a road
or railway you took to work, or maybe the information technology
connections you’re using to read this article. Federal, state, and
local taxes helped pay for that. Is your water and air clean? Are
you safe from threats, domestic and foreign? Then you’re getting
something valuable from the Environment Protection Agency, the
Federal Bureau of Investigation, and the Department of Defense.
Your tax dollars paid for those, too.
He has a tough sales job ahead of him, though. Seventy-six
percent of respondents to our recent Reason-Rupe poll say that
private charity does as well or better than government in getting
mileage from their tax dollars. That means Americans are
unlikely to knuckle down and submit to a bigger bill without
protest. That’s no small concern when you consider that the U.S.
has traditionally had the
highest income tax compliance rate in the world, and the smallest
shadow economy—that is, people engaging in otherwise legal
economic activity, but out of sight of the tax man and
regulators.
But that’s changing.
In recent years, the income tax compliance rate in the United
States dipped to 83.1
percent. That’s still high, compared to the United Kingdom at
77.97 percent or Switzerland at 77.7 percent, but the gap is
closing.
The U.S. shadow economy has also traditionally been smaller than
that of other countries. But last year, estimates that it had
reached $2 trillion and might account for the country avoiding a
return to recession made
headlines.
“You normally see underground economies in places like Brazil or
in southern Europe,” said Laura Gonzalez, professor of personal
finance at Fordham University. “But with the job situation and the
uncertainty in the economy, it’s not all that surprising to have it
growing here in the United States.”Estimates are that underground activity last year totaled as
much as $2 trillion, according to a study by Edgar Feige, an
economist at the University of Wisconsin-Madison.That’s double the amount in 2009, according to a study by
Friedrich Schneider, a professor at Johannes Kepler University in
Linz, Austria. The study said the shadow economy amounts to nearly
8 percent of U.S. gross domestic product.
Why the sudden growth?
Schneider, the shadow economy expert mentioned in that CNBC
story quoted above, remarks,
“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.” He adds, “The bigger the
difference between the total cost of labor in the official economy
and the after-tax earnings (from work), the greater is the
incentive to avoid this difference and to work in the shadow
economy.”
Which is to say, if you raise taxes, many people stop paying
part or all of them. They hide their efforts, and their income,
from the government. In fact, a lot of countries have much bigger
economies than official figures suggest, since so much of it
happens off the books. If underground activity is equivalent to 8
percent of the U.S. economy, it might be 15 percent of Sweden’s,
and 20 percent of Spain’s.
So, that larger government take that Cohn likes so much becomes
nominal, since it’s only a share of the official portion of the
economy. In fact, once you adjust for the size of the shadow
economy,
the government’s share in the U.S., at roughly (my estimates) 39
percent, is nearly identical to the German state’s 40
percent.
Cohn and his friends may not like to hear it, but the tax
scofflaws who flee the high taxes he favors have already been
credited with keeping America out of recession,
and
Spain functioning
at all. Let’s hear it for their scofflaw efforts.
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