When it comes to taxes, more Americans than ever say, ‘Pay up’

Daschle's, Geithner's, and Killefer's tax missteps come at time when 89 percent of Americans say it's unacceptable to fudge.

The tax woes of three of President Obama’s top-level appointees come at a touchy time.

Amid deep economic troubles and taxpayer-funded bailouts and stimulus packages, many Americans are supersensitive to double standards between political and business elites and “the rest of us.” Some are angry because a different set of rules seemed to be in play on that basic civic responsibility: paying taxes.

Despite the news headlines this week, the US has a remarkable culture of tax compliance, and that attitude seems to be strengthening.

In a 2008 survey sponsored by the IRS Oversight Board, 72 percent of citizens said they “completely agree” that it is every American’s civic duty to pay their fair share of taxes, and 89 percent – the most ever – said it is “not at all” acceptable to cheat even a little. The most recent IRS review of compliance found that, in tax year 2001, an estimated 86 percent of taxes owed were collected.

“The problem is not with the average person,” says Paul Caron, a law professor at University of Cincinnati and author of the TaxProf blog. “There’s a growing unease about people playing by a different set of rules ... and that can undermine the system.”

Mistakes, not evasion

The failures of Timothy Geithner, Tom Daschle, and Nancy Killefer to report and pay some of their taxes may be seen as mistakes and not deliberate attempts at tax evasion.

But large amounts of delinquent payments were involved for the two men, some point out – in Mr. Daschle’s case, larger than many people’s annual salary. Treasury Secretary Geithner failed to pay $34,000 in Social Security taxes while working for the International Monetary Fund, although he had signed a paper acknowledging his responsibility to do so. Daschle, nominee for both health czar and secretary of Health and Human Services, had to pay some $140,000 in back taxes and interest for use of a car and driver.

“It’s what Obama campaigned against – the ethos that’s developed in Washington over the last 25 years,” says Professor Caron. “People go there with good intentions and end up with a sense of entitlement that these rules that apply to the rest of us don’t apply to them.”

Others suggest the lapses were easily avoidable. “These are honest mistakes, but that doesn’t mean the people shouldn’t have been more pro-active in monitoring what they owe,” says Eric Uslaner, a government professor at the University of Maryland in College Park.

Americans clearly want the IRS to be vigilant. Some 82 percent said in the survey that it was “very important” to them that the IRS “ensures that high-income taxpayers are reporting and paying their taxes honestly,” and 86 percent said the same about corporations.

Why Americans pay up

What influences Americans to voluntarily report and pay their own taxes honestly? Is it fear of being caught, as some economists have surmised? When asked to identify the factors that have a “great deal of influence” on their compliance, 81 percent said “personal integrity,” 40 percent said “third parties reporting income to the IRS,” and 36 percent said “fear of an audit.”

Gallup annually asks Americans around tax time how they feel about the amount of taxes they have to pay and the fairness of the tax obligation. While about half said last April that their taxes were too high, 60 percent also said the amount was “fair.” That view of fairness was shared across the income spectrum. Those living in households earning $75,000 or more a year were no more likely to believe they paid too much than those earning less than $30,000.

While the US track record is good, some see a danger from publicized cases, whether they be about individuals evading taxes, tax shelters, or foreign banks that solicit off-shore accounts.

Offshore corporate accounts remain a hot issue in times of mushrooming deficits.

“These stories can cause people to distrust the tax system, which is a bad thing for the whole country,” says Charles Rossotti, a former IRS commissioner. “Although tax attitudes have held up very well, just a small erosion in that attitude toward compliance could mean devastating risk.”

Tax gap: $345 billion

He points to the impact of the small noncompliance rate. The “tax gap” between what was due and what was paid in 2001 amounted to an estimated $345 billion. (Enforcement efforts and late payments brought that down to $290 billion.) Underreporting of taxes accounted for 82 percent of the gap.

One area where evasion may be common, Dr. Uslaner says, is failing to pay taxes for household help – the problem that led Ms. Killefer to withdraw her nomination as the federal performance officer. “It’s generally not big money, and a lot of people don’t give it much thought,” he says.

Still, the US tax system is in better shape than those in many parts of the world. In developing countries, the compliance rate is influenced by the degree to which people feel that their government is corrupt or that it provide good services, says Uslaner, who has studied other systems.

Benno Torgler, an Australian economist, has studied “tax morale” – the intrinsic motivation to pay taxes – in 40 countries. He found that a key factor having a significant positive effect on tax morale across many societies is religious observance, whatever the faith involved.

Why US compliance higher

Compliance is higher in the US, Uslaner says, for two reasons: Corruption is lower, and most taxes are taken out at the source, so the opportunity to evade is not that great.

Despite the distress over corrupt politicians in recent years, he adds, corruption here at home is “still a drop in the bucket compared to other countries, and even to the way it used to be in the US. Our standards of honesty for politicians have gotten stronger.”