401(K)/Foter
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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