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Freakonomics in the Times Magazine: Filling the Tax Gap

The April 2, 2006, Freakonomics column is about tax cheating. Click here to read the column. This blog post supplies additional research material.

There is obviously a lot to be said, and a lot that has been said, about the I.R.S. and the U.S. tax code. For an interesting and highly readable overview, take a look at Taxing Ourselves: A Citizen’s Guide to the Debate Over Taxes, by Joel Slemrod and Jon Bakija. Slemrod, an economist at the University of Michigan, is a profoundly experienced researcher and author in this field. Click here to take a look at Slemrod’s tax writings, and click here for a working draft of “Cheating Ourselves: The Economics of Tax Evasion.” For a more literary take on the tax game, check out the very entertaining Confessions of a Tax Collector, by Richard Yancey.

Much of the key data for the “Freakonomics” column is derived from the I.R.S.’s National Research Program, a three-year study during which 46,000 randomly selected 2001 tax returns were intensively audited. From this sample, the I.R.S. was able to tell a great deal about what kind of taxpayer cheats, and to estimate the “tax gap” – the difference between the amount of individual income tax paid in a given year and the amount owed. Click here to see some of the data highlights of this research program. Click here to check out the past 10 years’ worth of I.R.S. audit activity; click here to see an I.R.S. overview and its 2007 budget; and click here to read a highly entertaining survey about taxpayer attitudes, conducted by the independent I.R.S. Oversight Board.

The “Freakonomics” column also makes brief mention of Michael Dukakis’s call, during his unsuccessful 1988 presidential campaign against George Bush, for greater I.R.S. enforcement. Stephen Dubner asked Mr. Dukakis to discuss this issue; Mr. Dukakis’s reply unfortunately came too late for the Times deadline. But the deadline on this website is far more forgiving – so here is their e-mail exchange:

Mr. Dukakis,
I’m writing about the huge tax gap in this country (about $400b now) and why the I.R.S.’s audit rate is so low. I seem to recall that you openly discussed upping the agency’s enforcement budget during your presidential campaign, and taking some heat for that, but I wanted to hear the story directly from you. Can you give me a brief description of a) what kind of changes you were prescribing and b) how these proposals were received among the press, the public, and Washington.

Yes, I raised the issue a lot during the campaign in 1988 because I had been so successful at going after tax evaders and avoiders when I was governor, and the returns were spectacular. We combined a ninety-day amnesty that was heavily publicized with a lot of very visible, stepped up enforcement, and the returns were beyond our expectations. In fact, a number of other states borrowed heavily from our efforts with similar results.

At the time I ran for the presidency I think the gap was about 120 billion, about half of the budget deficit at the time. Bush One accused me of trying to put an IRS auditor under the bed in every American household, which was pretty silly, but it was obvious even then under the Reagan administration that the number of audits was going down rapidly and people were avoiding the taxman with impunity.

If the gap is now 400 billion, the case for doing something about it is even stronger. And don’t let anybody tell you that you can’t do it with due process and fairness. In fact, we combined our enforcement effort with real efforts to reward honest taxpayers– refunds in less than two weeks, tax forms that an average mortal could actually read and understand, and stepped up free taxpayer assistance. It worked at the state level, and I have no doubt it can work at the national level, but it takes a president who wants to do it, and, unfortunately, the guy we have now appears to be distracted with other things. Whether he really wants to do it is also an open question. He certainly hasn’t demonstrated any interest in the subject over the past five years.

I hope this is helpful,
Mike Dukakis