NewTradingView.com – Investing and Stock News
Investing and Stock News
  • Investing
  • Stock
  • Economy
  • Editor’s Pick
Economy

Who Really Cheats the Government?

by August 16, 2022
written by August 16, 2022

The poorly named Inflation Reduction Act has little to do with fighting inflation. It has more to do with tax policy, and more importantly, tax policy enforcement. Indeed, the Internal Revenue Service (IRS) has been given a great deal of extra resources to conduct audits and investigations of potential tax evaders. 

The response by many is that more enforcement of tax policy is a desirable thing. Citing numerous studies, notably a famous one in the American Economic Review authored by Gabriel Zucman and two of his colleagues, defenders of greater enforcement point out that most tax evasion is done by wealthy individuals in the top 0.01 percent of the income or wealth distribution. Because of their vast wealth and high incomes, the richest can cheat governments more easily. As a result, the richest in society evade 25 percent of their taxes compared with less than 5 percent for people down the income ladder. Such proportions make it easy to then jump to “enforcement” in order to argue that more audits will allow governments to collect more revenues and close the deficit. 

There is, however, one major problem with this: It does not consider that everyone cheats the government in one way or another. 

Take the aforementioned famous paper by Zucman and his colleagues. That paper estimates tax avoidance by relying heavily on movements of wealth to foreign countries to avoid tax liabilities. This “offshoring” is costly to do, and only the richest can afford it – ergo the great degree of cheating frequently highlighted in the media. 

However, people with lower incomes cheat differently. Because of their modest means, they can more easily cheat governments by working illegally. For example, self-employed workers can “omit” certain cash payments they received in the course of fully legal work. Others can simply work an illegal job and not report anything. 

True, random audits ensure that enforcement could eventually catch these individuals. The problem is that these types of cheating are harder to detect because they are small relative to the economy’s size. For example, an undergraduate student who worked during the summer for a moving company for cash payment for three or four days (a classic occurrence in my home city of Montreal), could earn a few hundred dollars that tax authorities could hardly detect. This is why Zucman and his colleagues argue that random audits “are likely to miss some forms of tax evasion in the bottom and the middle of the distribution.” 

This is not a minor problem. A few hundred dollars for that undergraduate student represent a sizable share of his annual income. Waiters in restaurants can easily under-report large cash tips that will, at the year’s end, represent a sizable share of their annual income. As such, proportionally to income, tax evasion is greatly underestimated as you move down the income ladder. 

This claim of underestimating the evasion at the bottom of the income is consistent with well-known empirical facts regarding the underground economy (i.e., the informal sector, the shadow economy, grey and black markets etc.). For example, we know that poverty is a strong determinant of participation in the underground economy. We also know that the underground economy, which is quite large even in rich countries such as Canada, tends to disproportionately involve people lower down the income ladder. 

It is hard to arrive at a number of the extent of the underestimation of cheating by bottom and middle income groups, but there are clear signs of underestimation. With this in mind, one realises that the political quip that the rich just don’t pay what they owe is humbug. More importantly, one realises that greater enforcement by the IRS may lead to more collection of revenues at the top. However, it may also end up taking away income that, dollar for dollar, is more proportionally important for people at the bottom of the income ladder. In other words, the greater enforcement could be regressive. Policymakers and pundits should ponder this possibility before they wrap themselves in the cloth of virtue. 

0 comment
0
FacebookTwitterPinterestEmail

previous post
Is the Inflation Reduction Act Really a Climate Policy Game-Changer?
next post
Walmart Q2 results: ‘analysts are most bullish on discounters that sell gasoline’

You may also like

Government Siphon Targets Corporate Stock Buybacks

February 8, 2023

Is the Debt Ceiling Lunacy?

February 8, 2023

Book Review: How the “Chip War” Vindicates Economics

February 7, 2023

Be Grateful that First Responders and Teachers Earn...

February 7, 2023

The Not-So-Great Depression Diet

February 6, 2023

The Age of Decline

February 6, 2023

1619 Project: A Flawed Interpretation With a Hidden...

February 5, 2023

Words, Numbers, and Samuel Gregg

February 4, 2023

The Tragedy of the Monetary Commons

February 4, 2023

Supply Constraints and Inflation, Revisited

February 3, 2023
Enter Your Information Below To Receive Free Trading Ideas, Latest News, And Articles.


Your information is secure and your privacy is protected. By opting in you agree to receive emails from us. Remember that you can opt-out any time, we hate spam too!

Popular Posts

  • 1

    My Trigger to Enter $VAPR

  • 2

    Multi-Millionaire Trader Explains Why You Should Start Trading With A Small Account {VIDEO}

  • 3

    Scaling Up Tips From A 24-Year Old Millionaire Trader {VIDEO}

  • 4

    Pay Attention to These Stocks

  • 5

    New ‘Hunger Winter’ Looms as Europe Prepares to Shiver

Recent Posts

  • Disney Q1 earnings report: ‘this stock is unmatched anywhere else’

    February 9, 2023
  • Bank of America sees a 50% upside in this travel stock

    February 8, 2023
  • Google stock loses 9.0% after it’s A.I event: buy the dip?

    February 8, 2023
  • Ex-Coinbase manager pleads guilty to insider trading charges

    February 8, 2023
  • U.K. CMA issues provisional decision on Microsoft-Activision deal

    February 8, 2023

Categories

  • Economy (615)
  • Editor's Pick (235)
  • Investing (1,639)
  • Stock (9)
  • About Us
  • Email Whitelisting
  • Terms and Conditions
  • Privacy Policy
  • Contacts

Disclaimer: NewTradingView.com, its employees, and assigns (collectively “The Company”) do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.


Copyright © 2023 NewTradingView.com All Rights Reserved.


Back To Top
NewTradingView.com – Investing and Stock News
  • Investing
  • Stock
  • Economy
  • Editor’s Pick