Tax evasion is a case where the threat of prison works

Posted on

Reuter’s Purlitzer prize winning journalist David Cay Johnston has written on  my work for the Tax Justice Network on worldwide tax evasion. That work estimated a total loss to tax evasion of US$3.1 trillion world wide. The review included an excellent graphic of the top-10 countries by amount of tax evasion, set up against the size of their informal economies:

As David Cay Johnston writes:

A new report from London and President Barack Obama’s statements to “60 Minutes” show financial crimes spreading like wildfire and governments failing to stop them.

Tax evasion equals 18 percent of global tax collections, a new report by British accountant Richard Murphy shows. His report for the Tax Justice Network cleverly lined up a World Bank Report on the size of shadow economies with a Heritage Foundation report on average tax burdens by country to reach that figure.

Murphy’s $3 trillion estimate, 5 percent of the global economy, shows how a combination of weak rules on accounting and disclosure combined with inadequate budgets to enforce tax laws impose a terrible cost on honest taxpayers and the beneficiaries of government service.

This graph demonstrates quite well that developed countries are not insulated from the harms of tax evasion. They are losing important revenue right up alongside the largest developing economies.

But the sting was in the tail of the piece, and refers to comparisons between these figures and banking fraud in the USA:

Financial theft is a growth industry because of government failures that I would attribute to excessive reliance on the financier class for advice, campaign donations and absurdly well paid jobs for officials between their government jobs.

Will the next journalist who interviews President Obama please press the issue: where are the banking fraud prosecutions, Mr. President? And don’t let up until the president picks up the phone and tells Attorney General Eric Holder he wants a 1,000 or more major felony indictments in the next nine months.

I think that demand appropriate.

But it would be as appropriate to call for more tax fraud prosecutions too. It is the threat of prison that stops tax fraud; nothing much else does, especially with professional advisers. It’s time to get tough.