There is no myth about the Tax Gap – it’s real

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The Wall Street Journal published an editorial on 30 January (hidden behind their subscription wall) in which they challenged the assumption, inherent in recent Senate hearings, that tackling the Tax gap is a good idea. According to reports, the WSJ says:

The problem is that most of the financial and social costs [of tackling the Tax gap] end up being borne by those who already dutifully pay their taxes, in the name of catching the few who evade the law.

It apparently goes on to say:

The more complicated a tax system, the more likely taxpayers won't understand, or will try to dodge, the rules. Simple tax regimes, such as a single flat rate, encourage compliance and efficiency, not to mention economic growth. This has been the experience of many Eastern European countries after they imposed a flat tax, and the United States had similar jumps in reported tax income from "the rich" following the 1986 tax reform that cut rates and closed loopholes.

This is nonsense. Taxpayers will dodge the rules whatever they are. As a spokesperson for Moore Stephens said in the UK in 2005:

No matter what legislation is in place, the accountants and lawyers will find a way around it. Rules are rules, but rules are meant to be broken.

I wish it weren't true, but right now I believe that this is too common to accept the WSJ argument. And the rest of their ideas on flat tax are debunked by the IMF, amongst others. Eastern Europe has recovered as its come out of chaos: no more.

So what's the real WSJ agenda? I'm afraid it's to support tax competition, which its supporters claim to be a process where :

individuals can choose among jurisdictions with different levels of taxation when deciding where to work, save, and invest. This ability to avoid high-tax nations makes it more difficult for governments to enforce confiscatory tax burdens. In effect, tax competition pressures politicians to be fiscally responsible in order to attract economic activity (or to keep economic activity from fleeing to a lower-tax environment).

Note what this means though:

  1. Tax havens are good, although they can only work in secrecy and usually involve the use of criminal tax evasion practices;
  2. Secrecy is itself paramount - which places a higher value on individual property rights than government property rights, which is inappropriate;
  3. Inefficient markets are best, because this secrecy favours multinational companies over domestic ones, and old companies over new ones;
  4. The wealthy are favoured, since you cannot benefit from this process if you are not.

Nor has anyone ever proven the claims made, which are counterintuitive given these requirements - even of market theory in neoclassical economics, of which this theory is anyway a logical distortion since the assumptions required to make it work cannot and do not hold true in practice.

So, anyone who says the tax gap is a myth is actually saying that the tax evaders who criminally free-ride the world's economy, ably assisted by the suppliers of corruption services, should be allowed to carry on. I'm sorry: I think that's criminal.