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% of federal revenues. All told, as many as 30% to 40% of Americans won’t pay all of the taxes they owe in 2011. ...
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. ... 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. ... 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. ... 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 2% of all returns are ever audited, and only a tiny fraction of tax evaders are ever subject to criminal investigation or prosecution.
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.