Is Tax Evasion Normatively Good?

Much of tax law scholarship concerns how to improve tax compliance; in this literature, tax evasion is held out as normatively undesirable.  A senior researcher at the London-based Royal Society of Arts recently published a paper in which he argues that tax evasion in the UK might (actually) be a good thing.  In “Untapped Enterprise,” Benedict Dellot argues that the “informal economy” – those workers who do not declare their income for tax purposes – are an important part of the formal economy and that "formalization" itself is a process that occurs over the lifecycle of a business.  In some parts of the developing world, for example, the informal economy accounts for up to 90% of GDP.  The authors argue “If we rely too heavily on deterrence measures, we run the risk of derailing this[formalization] journey and preventing the entrepreneurial potential of thousands of hidden entrepreneurs from being realised.”

The study, of course, has some application limitations, but it’s an interesting read.  Should tax policy accommodate certain forms of “productive” noncompliance? Does it already do so?  I'd love to hear from some of our tax readers on this!

Comments

[Bill Turnier]

We academics should wake up and realize that we are merely some of the more highly paid elements among the army of working stiffs who can do little to avoid paying our fair share even if we have larceny in our hearts. That means that with reporting of our income by employers and withholding coupled with reporting of most of our other income (royalties, interest, dividends, etc.) we cannot avoid declaring virtually all of our income without incurring penalties. The IRS also has access to considerable electronic records on many of our deductions, assuming we itemize. We are in a class with other wage earners who for the most part, when it comes to income taxes, pay most of what we should.

Owner operators of many businesses are in a very different category. They have the financial motivation to cheat and the capacity to suppress reported income with some considerable freedom to cover their tracks in doing so. Among these individuals, the income tax often acts as a tax on integrity. I intensely dislike hearing from any advocate who cheers on he efforts of such dishonest individuals. Making all pay their fair share as dictated by law is an ethical issue. Those scoundrels who cheat, cheat not only the government but the rest of us who willingly or unwillingly pay our fair share. Scholarship that champions such behavior comes from the ethically indifferent who most likely are desperate to obtain academic attention regardless of the ethical issues involved. I am not surprised to see such grandstanding for attention among entertainers and politicians. It is most unfortunate to witness it among individuals holding themselves out as academic scholars,

[BDG]

I think Bill's response is an appropriate one to the suggestion of Taja-Nia's headline. But the headline doesn't, I think, quite capture the argument of the policy brief. I read the brief to be arguing for something like "responsive regulation" -- the goal is not to ignore tax evasion, but instead to increase tax compliance through methods other than simply penalizing noncompliance. There are a few folks now who have suggested that rewarding and educating "good" tax actors and reserving enforcement efforts for the worst could be more effective than pure penalties.

Having said that, a differentiated regime has serious targeting problems. In the U.S., for instance, most studies conclude that primarily-cash businesses pay something like half the tax they owe, and that those businesses are in the vicinity of 20% of the economy. Maybe one can change that behavior through education and "responsive" tax administration. But if not, or if the penalties are waived for actors who turn out to be "bad," reducing penalties is quite likely to drop the revenue collected even lower, and when you multiply that by 20% of the economy, you're talking a lot of money.

[Taja-Nia Henderson]

BDG: Agreed. The headline was written - in true NY fashion - to rope in readers. The study is about regulatory normativity, not (necessarily) behavioral normativity; regulatory regimes influence behavior, of course, but that's not the full picture here. Also, the targeting problem you describe is a serious one, esp. outside the US, where cash businesses account for an even greater share of the economy. I'm interested in your take on the "lifecycle" argument; is there something inherent in entrepreneurialism that warrants targeted tax treatment?

[Zach Bender]

if i grow vegetables in my backyard and i share some of the harvest with friends, and if my friends share some of their stuff with me, we are engaging in an informal economy that any government would like to tax. but in order to tax this activity, the government first has to monetize what those of us engaging in this informal economy might not have chosen to monetize. the transition occurs when we get beyond friends or when we ourselves start monetizing our exchanges. my backyard farm cannot make the transition to a sustainable commercial operation without working through this "formalization." this can occur organically, or i can be forced to seek capital investors or borrow money from a bank. if i go the organic route, at what point am i a "scoundrel" who "cheats" those who are engaged in a structured wage economy.