Nothing is Certain Except…

The April “Freakonomics” column in The New York Times Magazine will address –you guessed it– taxes. It’s about how people hate the I.R.S. for the wrong reasons and will run Sunday, April 2nd. The article should be available online here by late Sat. night (4/1/06), and bonus information is available here.

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  1. StCheryl says:

    Not having read the column yet (it’s Friday night), I feel perfectly free to speculate on its arguments and comment thereon.

    I’m guessing that the right reason to hate the IRS is its failure to establish/follow a good monitoring/deterrence process, and therefore compliance with tax law is lower than it could and should be. If done properly, it would function like a Lo Jack and discourage cheating more effectively and efficiently, and do away with the more complex tax dodges available to the wealthy currently in existence.

    One problem (perhaps you discuss this) is that the corporate tax causes huge distortions in consumption in order to avoid taxation, and creates incentives to engage in inefficient behavior, in addition to effecting double taxation of income from securities. It would be more efficient to abolish it completely, reduce the complexity of the tax code to make taxation more transparent, and tax the wealthy and upper middle class at much higher marginal and effective rates than currently is done.

    Having said that, I am interested in seeing how far off I am from the points raised in the column. I also expect to get blasted by the people who made the nominations for economists for president…

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  2. StCheryl says:

    Not having read the column yet (it’s Friday night), I feel perfectly free to speculate on its arguments and comment thereon.

    I’m guessing that the right reason to hate the IRS is its failure to establish/follow a good monitoring/deterrence process, and therefore compliance with tax law is lower than it could and should be. If done properly, it would function like a Lo Jack and discourage cheating more effectively and efficiently, and do away with the more complex tax dodges available to the wealthy currently in existence.

    One problem (perhaps you discuss this) is that the corporate tax causes huge distortions in consumption in order to avoid taxation, and creates incentives to engage in inefficient behavior, in addition to effecting double taxation of income from securities. It would be more efficient to abolish it completely, reduce the complexity of the tax code to make taxation more transparent, and tax the wealthy and upper middle class at much higher marginal and effective rates than currently is done.

    Having said that, I am interested in seeing how far off I am from the points raised in the column. I also expect to get blasted by the people who made the nominations for economists for president…

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  3. Jack says:

    I always like reading your articles but honestly the one on the IRS is not very interesting. The fact that self employed workers have stronger incentives is not only obvious, is also something that has been the focus of the debate on fiscal policy in pretty much every big European Country forever, for the reasons you describe in the article. Secondly it shouldn’ be surprising that compliance in the US is higher than in many other countries even if people are cheating: the tax pressure in USA is way lower than in Countries like France for instance. The incentive to cheat is increasing in the tax rate because the reward is increasing and the probability of an audit is basically unchanged (anything else the same). Therefore is reasonable to expect self employed workers to cheat “more” in Countries where taxes are higher.

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  4. Jack says:

    I always like reading your articles but honestly the one on the IRS is not very interesting. The fact that self employed workers have stronger incentives is not only obvious, is also something that has been the focus of the debate on fiscal policy in pretty much every big European Country forever, for the reasons you describe in the article. Secondly it shouldn’ be surprising that compliance in the US is higher than in many other countries even if people are cheating: the tax pressure in USA is way lower than in Countries like France for instance. The incentive to cheat is increasing in the tax rate because the reward is increasing and the probability of an audit is basically unchanged (anything else the same). Therefore is reasonable to expect self employed workers to cheat “more” in Countries where taxes are higher.

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  5. davidzet says:

    ditto on abolishing corporate taxes.

    ditto on not very original analysis of incentives (but, hey – this is the Sunday mag crowd). I would have put in a plug for the VAT/sales tax replacement of income taxes. It’s efficient because there are third parties who are interested in your honesty/charging you, it hits people all the time (tough to cheat on so many transactions) and it’s easy to consider it “part” of the price of the object — unlike income taxes, which seem to be taking away earnings that are your “right”.

    Oh yeah, sales taxes are easy to make progressive, involve no bookkeeping for consumers and increase the tax yield from informal workers. (Marijuana growers in CA produce the state’s biggest cash crop but pay zero in income taxes.)

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  6. davidzet says:

    ditto on abolishing corporate taxes.

    ditto on not very original analysis of incentives (but, hey – this is the Sunday mag crowd). I would have put in a plug for the VAT/sales tax replacement of income taxes. It’s efficient because there are third parties who are interested in your honesty/charging you, it hits people all the time (tough to cheat on so many transactions) and it’s easy to consider it “part” of the price of the object — unlike income taxes, which seem to be taking away earnings that are your “right”.

    Oh yeah, sales taxes are easy to make progressive, involve no bookkeeping for consumers and increase the tax yield from informal workers. (Marijuana growers in CA produce the state’s biggest cash crop but pay zero in income taxes.)

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  7. EmilyAnabel says:

    One thing that the article didn’t address is the question about “all-cash” businesses and how much more likely to understate income they are. It would be nice if there were some stigma attached to cash transactions, to give some social incentive for people to use more traceable forms of payment and thus share the tax burden more equitably. The responses to the IRS survey that showed that a strong incentive to not cheat comes from the W2 records filed by employers– this indicates that people are concerned more about getting caught when there is some kind of record.

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  8. EmilyAnabel says:

    One thing that the article didn’t address is the question about “all-cash” businesses and how much more likely to understate income they are. It would be nice if there were some stigma attached to cash transactions, to give some social incentive for people to use more traceable forms of payment and thus share the tax burden more equitably. The responses to the IRS survey that showed that a strong incentive to not cheat comes from the W2 records filed by employers– this indicates that people are concerned more about getting caught when there is some kind of record.

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