Technically, it is illegal not to pay your taxes, and we should all follow the law. But when it comes to tax evasion, the problem gets more complex than simply one of what is legal and what is illegal. So long as the law says we need to pay a certain amount in taxes, we should do so, but we should also keep in mind that tax evasion differs from crimes of property and violence in that it does not inflict harm on individuals.
On the contrary, from a moral viewpoint the tax is itself a crime of property. In his book Anarchy, State and Utopia – a must-read for all friends of freedom - Robert Nozick provides a carefully designed, very solid moral case for the minimal state. His book, written in part as a response to John Rawls’s poorly argued Theory of Justice, puts a firm limit on government at the gates of redistribution. Government can and should provide protective services for life, liberty and property (though Nozick does not concentrate his argument to those three terms) but if government tries to take from one person what he has rightfully acquired and give to another who has not rightfully acquired that money (or other resource) then government violates that person’s sacrosanct liberty.
Compared to the size of government we are dealing with today, almost 40 years after Nozick published his book, it is fair to say that there is an astronomical distance between our daily lives and the ideal society that Nozick has in mind. But his principles, derived from John Locke’s justice-in-acquisition theory as put forward in Second Treatise on Government, are timeless. They provide a strong moral argument against taxation per se, and are worth keeping in mind every time the issue of tax evasion comes up.
In addition to the moral problems with taxation there is also the economic side of governmental intrusions into our daily lives. Taxes stifle businesses and distort consumer behavior. The higher the taxes, the worse the economy performs.
The problem with tax evasion is the tax, not the evasion. Let us keep this in mind as we listen to the following complaint about tax evasion in California, brought to us by the Sacramento Bee:
As Californians put the finishing touches on their income tax returns, tax collectors say the state’s $9.2 billion deficit would drop to zero if all taxpayers submitted what they owe. That means every resident claiming the market value of tattered jackets donated to charity. Every business reporting every dollar of income they receive even when paid in cash. Every service worker reporting every tip. And every resident paying use tax on Internet purchases. But full compliance does not occur. In a new estimate, the Franchise Tax Board says that $10 billion in state income taxes go unpaid each year, often when workers receive payments under the table, businesses skirt reporting requirements or people take deductions for which they do not qualify. The state Board of Equalization says an additional $2.3 billion in sales and use taxes go unpaid.
The unpaid taxes correspond to approximately five percent of total state government spending in California. This money obviously remains in the hands of the private sector, and by rough estimate 80 percent goes toward private consumption. The part of this spending that is covered by sales and other consumption-based taxes then generate revenues for the state as well as local governments. In other words, it is a misrepresentation of facts to say that the state completely loses out on whatever taxes Californians evade.
And who knows? Some of the evaded taxes may even go toward paying property taxes, a major burden on families in the Golden State.
There is a reality behind tax evasion that is rarely recognized. While tax evasion is illegal and – again – we should of course always pay our taxes, it is important to keep in mind what the money thus withheld from government actually does for the economy. When people do not pay the full amount owed in taxes they do not just stash the money in the mattress. An auto repair shop that fails to report all its earnings and thereby keeps a bit more money than it otherwise would, can afford to keep another mechanic on its payroll. A trucking company that takes some load without reporting it can offer a small business somewhere a cut on the shipping rate and allow that business to keep its doors open. When the breadwinner of a low-income family gets some of his pay under the table he can afford to pay the lease on their apartment and they can avoid being evicted.
I am the first to recognize that tax evasion also distorts competition between compliant and non-compliant businesses. This is why I continue to stress that we should all obey the law. But when it comes to remedies for tax evasion, it is essential that we acknowledge what people do with the money they do not pay in taxes.
So long as we have a government larger than Nozick’s minimal state we will have to put up with taxes. But those taxes should be as low as ever possible, the code should be simple and transparent and the entire design should be based on the one-stop principle: you only pay taxes once on every dollar you earn. This would vouch for a user-friendly tax code which in turn would minimize evasion and do wonders for our economy.