Keating: ‘The Voluntary (but Tricky) Nature of Taxation’

January 17, 2013


A young man, selling Internet services in the U.S. and abroad, is amazed at the ability of Americans to self-correct as they adjust to the vicissitudes of the global economy.  He sees U.S. household debt, if not declining, in the process of being stabilized. The housing market is slowly, albeit painfully, adjusting. Workers, having exhausted unemployment compensation, are adapting to realistic salaries and benefits.

Virtually every American, according to this young salesperson, realizes the need to take a haircut on property values, expected income and spending aspirations.

Behavioral changes are difficult. Yet it appears as if American households, in response to the Great Recession and global circumstances, are slowly withdrawing from irrational portfolio exuberance, consumption excess and debt. Of course, these personal changes often occur by necessity rather than choice. Unlike government, the household sector is less able to kick the can down the road.

Even a young salesman must agree that the jury is still out on significant long-run U.S. government policy reform. Entitlement, tax, tort, medical, infrastructure, immigration and educational reforms slumber still.  It is simply politically expedient to pass these problems on to the next generation. If and when reform does take place, it must be in terms of traditional U.S. values such as industriousness, honesty, self-reliance and frugality rather than appear arbitrary or authoritarian.

The desire of the government for additional tax revenue may be reasonable, but Americans are accustomed to a high degree of liberty and indulgence in their need for consensus and fairness. Generally, they are less likely to respond to coercive policies than voluntary acceptance of the inevitable.

Nowhere is the consent of the governed more apparent than in the area of public finance. Economists speak of tax evasion, which is illegal, and tax avoidance, which represents legal changes in behavior to reduce taxes. In avoiding taxes legally, individuals opt for careers that pay less, with untaxed employment benefits, reduced work hours, clever accountants, earlier retirement and residency in low-taxed areas, etc.

Obviously, these behaviors reduce the amount of tax revenue collected. Policy makers then respond with disguised taxation, such as lotteries and value-added taxes. Such taxes fall heavily on those least able to afford them. They also give the government the ability to favor certain industries at the expense of others, which leads to shortages in certain commodities and services.

Few countries have been able to count on residents settling down in mid-April to a full examination of finance and conscience, wrestling personally with tax avoidance and tax evasion. Fortunately, most Americans, even when reluctant, have chosen tax compliance, because they perceive the tax system as being more-or-less fair between households.

Edmund Burke, the British statesman, referred to this as an inter-generational partnership not only between the individual and government but between those who are living, those who are dead and those who are to be born.

Maryann O. Keating, Ph.D., an adjunct scholar of the Indiana Policy Review Foundation living in South Bend, is co-author of Microeconomics for Public Managers, Wiley/Blackwell, 2009.



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