Last month in American Tax Compliance Rates Highest in Civilized World Despite What David Cay Johnston Says I refuted David Cay Johnston’s absurd claim that America’s low tax rates are the cause of it’s alleged rampant tax evasion:
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.
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.
Now here comes Cato’s Daniel Mitchell reminding us once again of what is obvious to everyone but Mr. Johnston: The higher the tax rates, the greater the non-compliance:
Simply stated, people respond to incentives. When tax rates are punitive, folks earn and report less taxable income, and vice-versa.
- When tax rates increase, sometimes they engage in tax avoidance, lowering their tax liabilities legally.
- When tax rates change, sometimes they choose to alter their levels of work, saving, and investment.
- And when tax rates go up, sometimes they resort to illegal steps to protect themselves from the tax authority.
In a previous post, I quoted an article from the International Monetary Fund, which unambiguously concluded that high tax burdens are the main reason people don’t fully comply with tax regimes.
Macroeconomic and microeconomic modeling studies based on data for several countries suggest that the major driving forces behind the size and growth of the shadow economy are an increasing burden of tax and social security payments… The bigger the difference between the total cost of labor in the official economy and the after-tax earnings from work, the greater the incentive for employers and employees to avoid this difference and participate in the shadow economy. …Several studies have found strong evidence that the tax regime influences the shadow economy.
Indeed, it’s worth noting that international studies find that the jurisdictions with the highest rates of tax compliance are the ones with reasonable tax systems, such as Hong Kong, Switzerland, and Singapore.
The above is an excerpt. Be sure to read the whole thing.