book review article

 

The Great American Tax Dodge by Donald L. Barlett and James B. Steele

 

Much of this work consists of small samples, which should be ignored except for entertainment purposes. The authors deliver a long, hilarious narrative report on the super rich Wildensteins of New York, whose failure to file or pay any income taxes attracted no government attention for two decades. The Wildenstein's tax evasions became public only because of an acrimonious divorce.

 

The government claims ten million non-filers exist. Barlett and Steele claim that number is a severe understatement because the IRS only calls a person a non-filer if a third party sends in a W-2 or Form 1099 or both. Thousands of non-filers earn over $200,000 a year; no one knows exactly how many exist. The authors report a tax gap due to fraud and error in 1999 of $300 billion. And when $300 billion is missing, the rest of us, and future individuals, make up the difference.

 

Because state, local, and payroll taxes are regressive, the authors argue that many middle-income individuals pay a higher percentage of their incomes in all taxes than many rich taxpayers. Some individuals earning less than $35,000 a year pay a third or more of their incomes in taxes. Thanks to economic ultraconservatism in Washington, the IRS is more likely to audit lower-income workers than the rich, though the amount of money the rich cheat the government out of is much, much more.

 

In fact, when a non-wealthy individual allegedly fails to pay enough taxes, the IRS presumes she is guilty and sends her a bill for fines, interest, and back taxes. IRS seizure of property is common. The government assumes it is her job to prove she is innocent.

 

If the IRS even bothers to notice a wealthy non-filer, it responds with a series of polite phone calls and letters. And if the wealthy person still does not respond, the IRS gets tough and decides to do nothing. The IRS does not send bills to the rich or seize property because the IRS fears it might not get all the government is owed from the rich, under the IRS principle that "no loaf is better than half-a-loaf." I am not kidding and neither are Barlett and Steele. Other problems abound. The Earned Income Tax Credit suffers from rampant fraud, often phantom children.

 

Republican and Democratic economic conservatives deliberately sabotage the IRS, then blame the IRS for the resulting mess, scoring points with citizens and creating room for more sabotage. Congress ensures IRS policies are ham-fisted. Supply-siders and their allies in Congress support almost any means of putting more money in the hands of the rich. Maybe they believe tax evasion spurs economic growth because every dollar in the hands of rich is a dollar put toward the engines of creation. But more tax evasion by the rich increases legalized bribery, damages the economy, wastes human capital, encourages more cheating, increases future taxes, reduces the wages of the non-rich, allows the wealthy to buy ever greater control of mass media, and adds to the array of other injustices. Much of the creativity exhibited by the wealthy is in creating fraudulent, mass destructive financial instruments. The IRS takes the blame while, paradoxically, the Congresspersons who turned the IRS into a mess get praised by their constituents for intervening on their behalf against the IRS. So much for the buck stopping at or near the top. Not surprisingly, members of congress and their staffs owe at least $10.5 million in back taxes.

 

(If any supporters of the wealthy managed to get this far in this review, go ahead, trot out the ad nauseum ad hominem "envy." And don't forget "class warfare" false claim and straw person. Never mind that most class warfare comes from economic ultraconservatism.)

 

Common methods of fraud include inflated and manufactured deductions, understated incomes, use of foreign tax havens, personal expenses charged as business expenses, returns not filed, and rich individuals with multiple passports claiming global residences.

 

The authors support international efforts to reduce money-laundering, tax evasion, and rogue banking. Rich criminals say such efforts would violate their right to privacy. Too bad. Their right to crime privacy is outweighed by the rights of others to protection from parasitism. Almost no one complains because the government has access to the financial records of ordinary wage earners, individuals who cannot afford armies of lawyers. Yet, the rich expect special privileges.

 

Many of Barlett and Steeles prescriptions are vague. Much of what the authors recommend falls into the tax "simplicity" and "equality" category (flat taxes), but a flat tax system would be unjust because the rich get the benefits of thousands of other "free market" government policies designed for them, including bailouts, corruption, monetary policies, nontax fiscal policies (cost-plus contracts, for example), etc. For all their support of flat taxes as "equality," the rich have no issue with promoting policies that tax the non-rich at higher rates. Warren Buffet is the only rich individual I ever heard complain that his secretary pays a higher percentage in taxes than he does. Money in the hands of the rich has diminishing marginal utility. If the authors were as good at policy as at narrative accounts, this would be one hell of a book. Worth a look.        

 

book review article by JT Fournier, last updated July 26, 2009

 

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