Here we go again.
The indefatigable David Cay Johnston has twisted the results of a study that says that America, with it’s low tax rates, has the lowest rate of tax evasion in the civilized world into one that says America, because of it’s low tax rates, has the most tax evasion in the civilized world.
Here’s Johnston’s description of the study:
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% 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% 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.
Murphy’s report covers 145 countries that generated $61.7 trillion of gross product, 98.2% of the world total. The 145 countries had only 61.7% of world population, a reminder of how poor the more than 2.7 billion people in the other 90 countries are.
Murphy estimates U.S. tax evasion at $337.3 billion, 10.7% of the global figure and close enough to the official IRS tax gap estimates to be credible. The United States has lower tax rates than eight of the nine other top 10 tax evasion countries. Rampant evasion in America raises doubts about the notion that high tax rates fuel evasion.
Here’s the chart Johnston refers to:
Now, witness Johnston’s contortionism:
While the United States has one of the most effective tax regimes, especially for on-the-books wage earners and pensioners, and one of the smallest underground or shadow economies, it has the largest amount of tax evasion measured in dollars.
The United States has lower tax rates than eight of the nine other top 10 tax evasion countries. Rampant evasion in America raises doubts about the notion that high tax rates fuel evasion.
Stunningly, Johnston claims that there is “rampant evasion in the U.S.” even though the very study he cites shows that there isn’t rampant tax evasion in the U.S. In fact, the study shows the very opposite: That the United States’ rate of compliance is the highest in the civilized world and it’s underground economy as a percentage of its economy is among the smallest.
Johnston, because he doesn’t like the results of the study (i.e. that America with its relatively low tax rates has the most effective tax regime and the smallest underground economy in the world), ignores them and focuses on America’s absolute dollars of non-compliance. He does this because he cynically assumes that most readers will not read beyond the headline.
The reason America has a greater absolute amount of tax losses from tax evasion than do other countries is simply because it has a much larger economy than those other countries. America’s shadow economy as a percentage of its GDP is a mere 8.6%, by far the lowest of the ten countries included in the study. This, and not absolute dollars, is the important statistic in the study and one that should prompt all fair and impartial observers to assume what, even without the study, it is intuitive to assume: The lower the taxes, the greater the rate of compliance.
I used to think Johnston was a smart gay because he often appears on cable talk shows and writes tax articles for the Wall Street Journal and Reuters. I now feel hoodwinked.
Is it possible that he does not understand that using absolute numbers to compare one country with another country is a logical absurdity. The moment you decide that you want to compare two un-identical things, you must control for differences. These differences, when you compare countries based on absolute tax dollars lost as a result of tax evasion, include, among other things, the size of a country’s tax base.
To illustrate the mediocrity of Johnston’s thinking, let’s apply his analysis to another fact pattern:
Rapes in America versus Rapes in Iran
Fact 1: America has strict anti-rape laws
Fact 2: Iran has lenient anti-rape laws
Fact 3: There were 12,000 rapes in America and 2,100 rapes in Iran in 2010
Johnstonian Conclusion: Rampant rape in America raises doubts about the notion that strict anti-rape laws reduce the incidence of rape
I wouldn’t be surprised if Mr. Johnston also concludes that America has a bigger crime problem than, say, Mexic0, simply because it has a higher prison population.