Tax Evasion--Posner's Comment

Becker presents persuasive evidence that the amount of tax evasion varies, as one would expect in a rational-choice model of taxpaying, with variance in the private costs and private benefits of evasion. I am inclined to believe that the private costs are higher than he suggests, which if true would mean that more tax compliance can be attributed to rational fear of punishment than he suggests and less to taxpayers' feeling a moral duty to pay taxes. For example, the civil penalties for tax evasion are quite severe (the fraud penalty is 100 percent of the amount of taxes evaded), and anyone charged with civil or criminal tax evasion will incur heavy legal and accounting expenses in defending against the charge. Although the audit rate is low, it is not random, but rather is higher for those taxpayers who are in the best position to evade taxes without being caught or whose tax returns raise a red flag because of unusually high deductions or other suspicious circumstances. And once one has been caught evading taxes, one can expect the rate of future audits of one's returns to be high. While it is true that underpayment of taxes is rarely prosecuted criminally, even when deliberate, criminal prosecution is likely if the tax evader takes steps to conceal the evasion, as by never filing a tax return, keeping phony books, or forging evidence of deductions. Moreover, the government does occasionally prosecute even small fry. Thus far I have focused only on punishment costs. But a neglected point in the economics of crime is the information costs of committing a crime. Evading taxes requires more knowledge than stealing a bike. Most taxpayers probably don't have a clue as to how to evade taxes without being caught. It might seem awfully simple--just list your cat as one of your dependents. But to know whether this would work, you would have to know whether the government has any independent source of information about the number of a person's dependents. You can't just go to a lawyer and ask him what the best way of evading taxes is. Most people comply with most laws most of the time. I believe that in most cases they do this not because they feel any moral duty to comply with law, but because the potential payoff does not seem to exceed the costs, including the information costs that I have emphasized. The reason I doubt that there is much of a felt moral duty to comply with tax law is that there is a vast amount of illegal behavior by normally law-abiding citizens. The flouting of the traffic laws, the theft of employer property, the nonpayment of social security taxes on household help, illegal gambling, and the employment (both personal and commercial) of illegal immigrants are only the most obvious examples. These are cases in which law enforcement is so lax that the expected punishment costs for most violations hover close to zero, and there are distinct benefits from violation. Still, Becker is unquestionably correct that there is a good deal of tax evasion apart from the social security example. It could be greatly reduced by stiffer penalties and a greater investment of resources in law enforcement. 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. The general question that Becker raises of the moral costs of committing crime is a fascinating one. I would be inclined to search as hard as possible for nonmoral costs before concluding that morality is a major motivator of behavior, especially with regard to crimes, like tax evasion, that do not have an identifiable victim. In the case of many crimes, the benefits to most people of perpetrating them would be so slight (and often zero or even negative) that sanctions play only a small role in bringing about compliance; enforcement costs needn't be high in order to deter when nonenforcement benefits are low. Some examples: the demand for crack cocaine among white people (including cocaine addicts) appears to be very small. Both altruism and fear deter most people from attempting crimes of violence, quite apart from expected punishment costs. The vast majority of men do not have a sexual interest in prepubescent children. Well-to-do people often have excellent substitutes for crime: any person of means can procure legal substitutes for illegal drugs (for example, Prozac for cocaine, Valium for heroin). Fear of injury deters most people from driving recklessly or while drunk. People who have no taxable income are incapable of evading income tax. People who do have taxable income can obtain benefits from evading it, but the costs of evasion are, as I have emphasized, nonnegligible, so there is widespread compliance along with a good deal of evasion. I would therefore expect differences across countries in tax evasion to be related more to differences in penalties, collection methods, and so forth than to differences in morality. Americans may exhibit higher tax compliance than Italians, but Americans are not a more moral people than Italians. This is not to deny the independent behavioral effect of social (including moral) norms, but on reflection one can see that these norms are enforced, even if not by law. When the cost of compliance with a norm is low, as in the case of picking up after one's dog, dirty looks alone may impose a cost greater than that of compliance. But taxes are not paid in public, so shaming is not a feasible alternative penalty to the legal sanctions for tax evasion.

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