The deceptive success of tax-fighting

In these days it is often to meet news of someone caught in tax-hiding, or about a prosecution against bigger tax evaders. Usually the news is about the details of the case (for instance being caught because of e-mails) and not about the core of the case.

Imagine a situation with no tax evasion. Imagine a perfect and infallible IRS with no one capable of hiding income and taxes. If you have all this, will you have more money in the budget?

Absolutely no.

Instead you will have a crushed business and less economic activity.

The main purpose of the business is making money. It is not paying taxes. So when someone hides some of the taxes owed, this makes him better motivated for doing business. I.e. he has a higher profit.

If the taxing system is too heavy and says you that you owe an enormous share of your income to the government, you can remain in business only if you can hide some of the income. Otherwise you can work, but only to give the money to Obama :)

So focusing of control measures and inspections is the wrong way of thinking. It is some socialist assumption that there are bad guys who are hiding the money and the good IRS officers are to beat them and return the money to the society. I.e. there is an assumption the business will always exist and the government must track, fine and tax it. But the truth is some different. The existence of the business is not granted. It can also be closed. So the triumph of the IRS sometimes means bad times for much jobs…

March 13th 2013

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