Tax evasion: Why do so many Americans cheat?

By Stuart P. Green, CNBC.com guest blog

Benjamin Franklin famously remarked that nothing in this world is certain but death and taxes.

But what would Franklin have said about the tax gap, the difference between the amount of tax due to the federal government and the amount taxpayers actually pay?

This year it’s likely to approach $300 billion, or nearly 15 percent of federal revenues. All told, as many as 30 to 40 percent of Americans won’t pay all of the taxes they owe in 2011.

What’s going on here? Why and how are so many people avoiding what Franklin thought was a certainty?

Much of the gap is the result of good faith mistakes by taxpayers — no surprise given the mind-numbing complexity of the tax code.

But some significant part of the disparity is the result of intentional evasion, non-payment, or underpayment. The question is why. Why are so many Americans willfully and flagrantly violating our tax laws?

The issue is a complex one, but a few key factors can be identified. One is that the norms associated with the duty to pay taxes are surprisingly weak. Most scholars agree that society’s ability to enforce compliance with the law lies less in the government’s power to impose sanctions than it does in the norms by which people direct their lives.

Generally speaking, people refrain from committing crimes not because they fear sanctions if they do, but because they believe it is morally wrong to engage in the conduct prohibited.

In the case of paying taxes, lots of people apparently believe it’s not morally wrong to fail to pay what’s owed. Suspicion of taxes is deeply rooted in our national psyche, going back to the Boston Tea Party of 1773 and the Whiskey Rebellion of the early 1790s.

In the current political climate, taxes have been so demonized that many citizens regard taxation itself as wrongful. And if people believe that taxation itself is wrongful, then it would seem to follow that such people would also believe that the failure to pay taxes is not wrongful.

There is also a widespread belief among many citizens that others in the community — both their neighbors and their leaders — are failing to pay the taxes they owe. And, to some extent, they’re correct. (For example, none other than Treasury Secretary Timothy Geithner admitted that he failed to pay $34,000 in Social Security and Medicare taxes while employed at the International Monetary Fund.)

If people really believe that “everyone else is doing it” – that everyone else is failing to pay the taxes they owe — it’s no wonder they think it’s okay for them to do the same thing.

Many also believe that the tax code is unfair and that tax revenues are being used for unwise purposes.

Whether one is a liberal who thinks that more of the tax burden should be shouldered by the very rich, or a conservative who believes that the government shouldn’t be in the business of supporting the poor, one is likely to be dissatisfied both with the formula that determines who pays what, and with what our government decides to spend the money on.

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In such an environment, it’s not surprising that some people would believe that non- or under-payment of taxes is not only not wrongful, but is actually justified.

Perhaps the most significant factor that explains the yawning breadth of the tax gap, however, is that our system of enforcing the tax laws is inadequate and uneven.

According to the IRS’s Citizen Oversight Board, the agency is so understaffed and underfunded that it simply can’t keep pace with increases in tax evasion. Less than two percent of all returns are ever audited, and only a tiny fraction of tax evaders are ever subject to criminal investigation or prosecution.

And with respect to the nation’s largest corporations (those reporting assets of $250 million or more), the IRS has, since 2005, sharply reduced both the number of audits conducted and the amount of time it spends on each audit.

There are also serious geographical disparities in tax enforcement: Residents of California, for example, are much more likely to be audited and prosecuted than residents of the New York metropolitan area.

Such irregular enforcement practices not only leave potential tax dodgers undeterred, but also send a message that the obligation to pay taxes is not really that important.

None of us, of course, actually likes to pay taxes, and there is no shame at all in trying to reduce one’s tax liability by all means legally permissible. Moreover, none of us would want to live in a society in which the IRS was constantly peering into our most private business affairs.

Still, tax revenues are the fuel that keeps the engine of government running, and it’s essential to our democracy that everyone do their part to help pay the debts our society collectively incurs.

As we face yet another April 15 deadline, we should resolve to create a tax system that is fair enough both in its substance and in its enforcement that more citizens will feel an obligation to pay their taxes.

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Stuart P. Green is a Professor of Law at Rutgers Law School-Newark, where he teaches courses in criminal law and criminal procedure. His books include "Lying, Cheating, and Stealing: A Moral Theory of White Collar Crime" (published by Oxford University Press in 2006), and "Thirteen Ways to Steal a Bicycle: Theft Law in the Information Age" (forthcoming from Harvard University Press in early 2012).