David R. Henderson  

Is Tax Dodging Bad or Good?

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Be skeptical, be very skeptica... The Greek turmoil...

Your answer will depend on your values and your model of government.

Whether dodging taxes is "good" or "bad" is a value judgment that takes us outside the field of economics. But surely one's value judgment will depend, at least partly, on the consequences of tax dodging. From the vantage point of orthodox public finance, dodging taxes is naturally considered bad because the burden of financing essential public expenditures is transferred to compliant taxpayers. Bad taxpayers free ride on good ones, who become the suckers. In our public choice model, however, dodging taxes provides a built-in check on Leviathan. Tax dodgers are not free-riding on other taxpayers; on the contrary, taxpayers benefit from tax dodgers' resistance. They benefit because potential tax resistance prevents Leviathan from increasing everybody's tax burden even more.

The two approaches suggest very different solutions. In one case, increased tax dodging must be met with more repression. In the other case, the best response consists in implementing effective tax cuts and other limits on Leviathan's resources.


This is from "The Economics of Tax Dodging," by Pierre Lemieux. It's one of the two Feature Articles for January.

Note the Figure on corporate income tax rates in OECD countries.


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CATEGORIES: Taxation




COMMENTS (27 to date)
Ken from Ohio writes:

This is a very interesting issue. and it depends upon the definition of "tax dodging"

If a person fails to pay the legally required tax, that is not a "tax dodge" that is tax fraud, and they should be prosecuted.

However, if a person uses the tax code to minimize their legally required tax burden, then that is right and proper. Using the tax code to minimize the legally required tax burden is typically what is meant by a "tax dodge" or "tax loophole".

There are certain people that get upset when a taxpayer follows the law to minimize a tax burden, because they are considered to be violating the intent of the law.

But what is the intent of the law? There is no way to know. All that is known is what is actually written into the statute.

So for those that get upset with the use of a "tax dodge" or "tax loophole", they should advocate for a simplification of the tax code.

A flat tax without deductions would make the intent of the law clear and eliminate the entire controversy of the "tax dodge".

N.B. "The best place to hide a book is in a library. The best place to hide money is in a complicated tax code"

ryan p writes:

The latter claim is surely empirical. How's the track record of deficits in reducing spending?

Philo writes:

"From the vantage point of orthodox public finance, dodging taxes is naturally considered bad because the burden of financing essential [?] public expenditures is transferred to compliant taxpayers. Bad taxpayers free ride on good ones . . . ." And, similarly, orthodox historians of U.S. slavery should point out that, at least before the slave trade was outlawed, slaves who escaped thereby created demand for replacements, so that the burdens they were shedding were transferred to newly captured others--the "suckers" in the scenario. But it seems that this obvious point about the dubious ethics of escaping slavery is not often emphasized.

mickey writes:

Whether one should be prosecuted for "tax fraud" depends on values or something too, right?

vikingvista writes:

Orthodox public finance mistakenly thinks tax dodging burdens the compliant, because orthodox public finance treats tax collecting and spending as though it is regulated by market discipline.

There can be only one reason why disobeying the viscous demands of extortionists can be immoral--you might very well get caught. When a good person allows herself and those she cares about to be diminished by the corrupt, corruption wins.

ThomasH writes:

If it is legitimate to break the law requiring that a certain tax must be paid, is it equally legitimate to shoot in self defense (with a legally purchased hand gun) the officer who tries to enforce that law?

I think such questions are best left to those who crash planes into IRS offices.

ColoComment writes:

Judge Billings Learned Hand (1872-1961), one of the most important federal judges of the last century, wrote:

“Over and over again, courts have said that there is nothing sinister in arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich and poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions.”

Commissioner of Internal Revenue v. Newman, 159 F.2d 848 (2d Cir. 1947) (dissenting opinion).

Moreover, Justice George Sutherland (1862-1942) of the United States Supreme Court wrote:

“[T]he legal right of a taxpayer to decrease the amount of… what otherwise would be his taxes, or altogether avoid them, by means which the law permits cannot be avoided.”

Gregory v. Helvering, 293 U.S. 465 (1935).

Searched for and conveniently found together, here:
http://www.assetlawyer.com/what-we-do/estate-planning-law/minimizing-taxes/

Ken from Ohio writes:

In his paper Prof. Lemieux makes several interesting points.

1): Judge Learned Hand observed eight decades ago: "[A]ny one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes."

2): Taxation has evolved away from a system of revenue generation for the provision of public goods - those things that are generally consumed, are non-rival and non-excludable, to a system of revenue generation for the provision of private goods - those things that serve the interest of private individuals and groups that support the incumbent government (public choice)

3): "starve the beast" is an ineffective strategy to minimize government spending. The only effective way to protect economic activity from taxation is for the economic activity to move underground - tax evasion.

And given the fact that taxation is now predominantly a system of revenue generation for private largesse (as opposed to public goods) - tax evasion is right and proper.

Interesting paper

ThomasH writes:

So is the Libertarian position that taxation (hopefully including Pigou taxes) to provide for public goods so that we can now move on to discussing which expenditures are public goods?

Ken from Ohio writes:

My libertarian (short) list of public goods - those things that fit the definition of generally consumed, non-rival, and non-expendable

Secure Boarders
National defense
Roads and Bridges
Law enforcement and court system
Environmental protection (?)

Private Goods - the major source of government spending
These do not fit the requirements of general consumption, non-rival, non-expendable

Farm subsidies
Social Security
Medicare
Public Universities
Mortgage interest deductions
etc.
etc.
etc.

The list of private goods funded by tax dollars is seemingly infinite


Ken from Ohio writes:

oops

non-excludable - not non-expendable

Tom West writes:

I'd say that given that Western countries are democracies, their level of taxation approximates the demand for services by the electorate and indeed, in many cases the taxation level is below what is necessary to pay for services demanded.

Public choice has some interesting insights to offer, but I think assuming the government policy and taxation levels are utterly divorced from the electorate's wishes is pushing the bounds of incredulity.

That makes tax dodging in the sense of non-payment of taxes owned pretty much like breaking any other law that one disagrees with in order to secure greater personal gain. One can argue the law shouldn't exist, but the majority aren't likely to be too sympathetic.

Tracy W writes:

Tom West: public opinion fairly consistently wants lower taxes, lower government deficits (or, more dramatically, the country not to be dependent on the whims of international money markets) and more government spending on everything but foreign aid.

For this reason, government policy does tend to be somewhat divorced from the electorate's wishes.

That makes tax dodging in the sense of non-payment of taxes owned pretty much like breaking any other law that one disagrees with in order to secure greater personal gain.

The definitions I'm used to is "tax evasion" is the illegal stuff, so not paying taxes owed, "tax dodging" is the legal stuff.

There's a spectrum (note, I'm not a tax lawyer, or accountant, I'm confident you're safe if you stick to the first point on my spectrum, otherwise consult an expert!):
- Things like giving up smoking in response to a rise in the excise rate, or installing solar panels on your roof because there's a tax deduction involved, or buying a book rather than a map because the sales tax is lower on books. This is generally the stated goal of the policy.
- Things like starting a business from home and offsetting your office space against your taxes, even though said office space is not raising your costs any. Or adding a pamphlet to the map to make it into a book. Or classifying an expense as, say, R&D rather than operating expenditure when it's on the borderline but the R&D deduction is higher.
- Things like setting up your company as a LLP rather than a QBC (I can't recall what these acronyms mean) because of the tax benefits. Or paying your spouse a small salary to do the company's paperwork rather than doing it yourself because it lowers your overall household tax bill (assuming you live in a country with individual taxation and a progressive income tax).
- Things like maybe paying your spouse a bit more than the normal market rate for the paperwork, though maybe your spouse is particularly good at this, maybe the use of trusts to avoid inheritance tax.
- And closer and closer to tax evasion - what risk do you want to run of imprisonment rather than a fine stuff?

AS writes:

Liberty requires the right to say "no", including to unjust taxes. People forget it was excessive taxation that started the American Revolution. It's ironic that a country founded on limited government now has public spending in the trillions of dollars, mostly on things the founding fathers would have never allowed. Jefferson, Madison, et. al. must be turning in their graves.

Sammy Finkelman writes:

@Ken from Ohio: How is "secure boarders" [sic] libertarian?

2. I think the word "tax dodging" as used in this post means illegally, and is probably used as I suspect it is, in the United Kingdom. In the United States the term would be "tax evasion"

David R. Henderson writes:

@Sammy Finkelman,
No need to speculate. The author defines the term “tax dodging” early in the article.

Nathan W writes:

Would it be wrong to dodge taxes which support the N Korean regime? How about taxes which support a welfare state?

Vivian Darkbloom writes:

Yes, the author early on defines "tax dodging" as *either* tax avoidance or tax evasion. Just how useful is lumping those together for the purpose of making value judgements "that takes us outside the field of economics"?

Tom West writes:

Tracy W

Indeed, the electorate has diverse wishes, but they have fairly consistently voted for greater services, which implicitly means the bill to go with them, so I'll maintain the claim that taxes are not "imposed" by a third party upon the electorate.

Sammy, just to clarify, the author used tax avoidance for the legal stuff and tax evasion for the illegal stuff and tax dodging for both.

AS, I think the government moderately well reflects the populace's desires. I'm certain there's a good young adult novel about a society where the government where the founders have been dead 200 years but they've managed to impose their beliefs upon an unwilling populace all this time. Major government changes should be slow, but also they need to reflect their citizens.

Ken from Ohio writes:

I see the point

A case could be made that secure borders (as opposed to boarders)is contrary to liberty. After all there is a reasonable opinion that open borders with the free flow of immigration and emigration is appropriate.

I was making the case that border security is a public good - by the usual definition.

Tracy W writes:
Indeed, the electorate has diverse wishes, but they have fairly consistently voted for greater services, which implicitly means the bill to go with them

The electorate also votes for taxes, and they've not noticeably been voting for greater taxes in recent years. Particularly given an aging population and increased government healthcare spending everywhere In the USA, the Republicans seem to win elections from time to time, in the UK, the Conservatives are in power, etc. Doesn't this equally mean that people are voting implicitly for lower services?

There's also the issue of who the voter thinks will be paying the taxes for the services they want. If I and 50% of the rest of my electorate vote for a party that promises to pay for its services by only raising taxes on people called "Tom", how does that make you feel about the validity of paying those taxes? Even if 30% of Toms also vote for the party?

ColoComment writes:

"Indeed, the electorate has diverse wishes, but they have fairly consistently voted for greater services, which implicitly means the bill to go with them."

But, if even those who DO pay taxes don't personally "feel" the increased pinch of the bill for those greater services, then where's the cost feedback that will perhaps alter their voting inclination?

For example, if those greater services (such as 2-yr UI, SNAP expansion, ACA subsidies) are paid for with borrowed money on which the government pays a near-zero interest rate, the "bill" is effectively deferred beyond the term of the current voter. To him, it appears "free," so why not vote for more?

ted writes:

It's one of those things where lots of people would say that tax dodging is bad, and some aggressively so - will even preach it from the likes of Guardian left-wing tribunes - and then proceed to just do that, tax dodging.

So I'm not sure if the answer matters much.

It seems to me that tax dodging done by others is generally viewed as something bad or very bad, but reflexively it's not that bad at all, irrespective of your values and model of government.

Tom West writes:

Tracy W

The electorate also votes for taxes, and they've not noticeably been voting for greater taxes in recent years.

Sorry, let me make it clear - I was talking about changes since the '50s (i.e. the long term). I do suspect that we're reaching closer to peak services/taxes, and I'd expect services and taxes to bounce around current levels for quite some time, including some service rollbacks.

However, I'll be *greatly* surprised if there is any electoral support for rolling back 50-60 years of spending/tax increases.

Tracy W writes:

Tom, the changes since the 1950s include the 1960s and 1970s, which was a high-inflation time with little indexation of tax brackets. That drove up income tax collection a lot, without anyone voting for it. It's like if I voted for the "Tax Toms More" party and they managed to expand "Tom" to cover everyone whose name contains a "T".

And taxation was already high going into the 1950s, because taxes were raised in WWII, and never really dropped, similar pattern after WWI. People consented to pay higher taxes for defence, not government services generally. The money just got repurposed.

However, I'll be *greatly* surprised if there is any electoral support for rolling back 50-60 years of spending/tax increases.

Yes, most people are entirely happy with extensive government services that other people pay for. It's just *them* who shouldn't be taxed. Or *them* and whoever else they think can join them in a useful lobbying block.

Tracy W writes:

Following up for my point, that voting for more government services to be paid for by someone else is rather different to voting for more government services to be paid for me, this article lays out some historical data for the USA:

2/3s of Americans support raising taxes for households making $100,000 or more. Average household income in the USA is about $50 - $60 thousand a year. $100,000 is the 80th percentile.
60% of Americans with an income over $100,000 think that taxes should be raised on millionaires. How many of the Americans making over $100,000 are millionaires?

In 1985, "69 percent felt that "people who have more money than you" were paying too little in taxes - while they themselves were paying their fair share (51 percent) or even too much (45 percent)." So in 1985 about 96% of these people who thought that other people should be paying more in taxes didn't think they should be paying more in taxes themselves.

And that's even before you get into subtleties like "Well, obviously, people with my income should be paying more, however, there should be tax exemptions for people doing really important stuff, like having kids/installing solar panels/donating to the opera/etc."

News flash: people love spending other people's money.

AS writes:

If you believe the electorate wants higher taxes and therefore higher taxes are justified, that's a bit of a tautology, and you are assuming political institutions are efficient. Public choice research shows that political institutions are not only inefficient, but also biased, so special interest groups and proponents of state power creep will have a disproportionately stronger voice in the political process. The result is we get a level of taxation and pork that is not truly reflective of the electorate's preferences.

Nevermind the fact that "the electorate's preferences" doesn't really exist. Only individual preferences exist. They cannot be aggregate. Politics tries (and fails) to aggregate preferences while markets respect individual preferences, permitting completely unanimity without conformity. Politics necessarily creates losers, while markets make everyone a winner.

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