I shouldn’t tell you this. Publicity will only make the problem worse. But you deserve to know: Tax cheating is about to rise in the United States.
Today, Americans are among the most law-abiding taxpayers in the world, by which I mean they lie to the taxman much less than people in other countries do. Today, about 82 cents of every dollar owed in U.S. taxes gets paid voluntarily, which is high.
Here are six reasons that number is going to fall:
1. Congress has gutted Internal Revenue Service enforcement.
The most important determinant for tax cheating is: Can I get away with it?
The answer, increasingly, is yes.
Thanks to budget cuts, audit rates have plummeted, especially for the biggest corporations, with armies of sophisticated tax preparers. Criminal tax prosecutions have nose-dived, too.
In some districts, the IRS has openly acknowledged that scofflaws owing under $1 million will get a free pass because the agency no longer has the resources to go after them.
That acknowledgment is bad, as is the fact that I’m drawing attention to it. Tax cheating is more dependent on perceived probability than actual probability of getting caught.
2. Budget cuts have also hurt IRS customer service.
Wait times on the IRS’s toll-free phone lines are finally down, but the agency still will answer only “basic” questions (i.e., the ones you can Google yourself), not the complicated ones taxpayers actually need help with. Don’t be surprised if some who are trying to pay their taxes honestly get frustrated and simply give up — and do whatever seems cheapest.
3. The growing perception that everyone else is doing it.
Both left and right are mad that certain populations don’t pay their “fair share.” Conservatives, stoked partly by Mitt Romney’s infamous “47 percent” comments, believe the poor pay too little. Liberals, stoked partly by the low tax rates paid by the likes of Romney, believe the rich pay too little. And a growing share of Americans overall think their own tax bill is “too high” and “unfair.”
In other countries, this (often well-founded) belief that everyone else is shirking has led to cascading tax evasion.
“My sense in Greece and other areas that have low compliance rates is that people look around and say, ‘Why should I be a sucker and be the only one who actually pays?’ ” IRS Commissioner John Koskinen told me in a phone interview. (Which is another reason a column predicting more tax cheating could become a self-fulfilling prophecy.)
4. Declining trust in government.
A troubling working paper, by economists Julie Berry Cullen, Nicholas Turner and Ebonya Washington, suggests that tax evasion rises when taxpayers are not in “political alignment” with the government. That is, Democrats cheat more if a Republican holds the White House, and vice versa. Earlier research has also shown that general distrust in the government reduces compliance.
Now consider the long-term downward spiral in trust in the U.S. government and the democratic process; the fact that politicians on both sides of the aisle preach that the political system is rigged; and Americans’ increasing perception that their partisan opponents are not only wrong but also immoral and malevolent.
All these trends will make shortchanging the government even more attractive.
5. The tax code gets more complicated every year.
This results in more opportunities for innocent error; increased perception that rich people with fancy tax preparers get away with murder; and, again, more people simply giving up on calculating their tax bills accurately.
6. The rise of the “gig economy.”
People rarely cheat on their taxes if they know there will be substantial third-party reporting and withholding, as is the case with traditional, W-2 employees. Ninety-nine percent of these taxes get paid voluntarily. But for income subject to little or no information reporting — such as income from odd jobs — only about 37 cents of every dollar owed gets paid.
In addition, lots of self-employed “gig economy” workers, such as Uber drivers, probably don’t realize they’re supposed to be making quarterly estimated tax payments and paying both parts of their payroll taxes. That means they may get hit with an unpleasant surprise come April 15 — increasing their incentives to fudge the numbers.
Now, there are at least two counterarguments to my dire prediction: Fewer business transactions are done in cash today, so they’re harder to hide; and, relatedly, in the era of “Big Data,” there’s more third-party information for the IRS to check to figure out if people are cheating.
There’s also plenty politicians could do to prove me wrong — by, for example, simplifying the tax code, or adequately funding IRS enforcement, or stopping actively delegitimizing the government.
I’d be thrilled if they did, but I wouldn’t bet my tax refund on it.
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