For most of us, taxes are a simple but mind-numbing chore: You dust off your TurboTax login, you type the numbers into the little boxes, and a seemingly random number is generated telling you how much you owe or how much you get back. It's routine enough that most people do it without thinking, save for those who refuse to give the government money for reasons of conscience and the One Percenters who hide their money in offshore accounts.
But as people prepare to shoot their debts electronically over to the IRS this Monday, it seems like the government has placed a pretty large amount of trust in ordinary citizens. What if the nation broke out in a massive case of senioritis and decided not to bother with all that math? What would happen, in other words, if no one paid his or her taxes? To find out, I asked Howard Chernick, a professor of economics at Hunter College who focuses on government spending and taxation. Here's what he told me:
VICE: What would happen if no one filed a tax return?
Howard Chernick: Well, the income tax is probably fifty or sixty-five percent of the federal government's money. Most people pay their income tax in the form of withholdings throughout the year. So the federal government has our money already, and what's happening on the end is just accounting reconciliations. But if no one filed his or her income tax, that would mean a huge increase in tax evasion, and much less money for the federal government, which already runs substantial deficits. So the government would have to borrow a lot more money, and the spending would have to go way down. After that, the US economy would begin to go into the tank. So as painful as it is, if you wind up owing taxes, as Oliver Wendell Holmes said, that's the price of civilization.
But don't the majority of people get refunds? And wouldn't that mean it wouldn't be quite so much of a disaster if no one filed?
There are more refunds; people are overwithheld. So for those folks, it works as a kind of forced saving. You get a lump sum that you can then spend for some item you may not have been budgeting for on a weekly or monthly basis. A bunch of economists have argued, pretty persuasively, that with modern computers, the government could do your taxes for you with no problem. The computer could do that stuff with the blink of an eye. They would have all your information, so you would either get a check or a bill in the mail.
In a sense, that would be like no one filing a tax return, and it would be a lot better, because people pay a non-trivial amount for TurboTax and those other services to say nothing of the H&R Block tax preparation. And the system now is very time consuming. You could automate that for the vast majority of taxpayers in the United States. For people with a lot of money or with complicated incomes, that would not work. So you would have a choice: Do you want the government to prepare your tax return, or do it the traditional way? My guess is that once people gained confidence in that, people would want it taken out of their hands.
Do most people in America cheat on their taxes?
One aspect of a well-functioning country is that people voluntarily pay their taxes. And that's pretty much the situation in the United States with some exceptions. The exceptions don't mean particular people, but particular types of income. So wages, which are the vast majority of people, those people pretty much pay all the taxes that are due. But self-employment income, and investment income—there's a lot more tax evasion there. Those people still file their taxes, which isn't quite the doomsday scenario you've asked me to speculate about, but there's a lot of opportunity for underreporting income and overreporting expenses. But are we a nation of tax cheats? Basically the answer is no. You won't find a single person on April 15 saying "I love the government," but by complying, they're saying, "It's my duty to do so."
The IRS budget has been cut in recent years, and its officials say that if they had more money for enforcement and other things they would bring back a lot more in uncollected taxes. What's your take on the Republican hostility toward the IRS?
That's one of the dysfunctions, or tragedies, not to be too dramatic, about the American political system. One party has decided that it makes good politics to bash the IRS and systematically reduce their budget. And that's important, too, because the probability of being audited has gone way down. I think even though we're generally a nation of tax compliers, people take into account the likelihood of being audited. Starving the administration of tax enforcement is tantamount to saying you don't have to pay your taxes. They would never say it that way; it's always cast as, "The IRS is this inhumane bureaucratic institution," which is a political stance and not a reality.
That's an interesting thought, that one road to implementing small government is to go after the IRS.
That cuts into revenue directly. It's probably the most direct action you could do. Anyway, it plays politically. You heard Ted Cruz, who's vying for the Republican nomination, saying that among government agencies, he wants to abolish the IRS. He says he'll replace it with something, but he doesn't really specify. But for a public finance economist like myself, that's a complete nightmare. That's a recipe for the destruction of the United States as a functioning country. Not to be melodramatic, but all of the government programs we depend on would be hurt.
I'm assuming that eliminating the IRS is supposed to be an appeal to the heartland, but it basically seems like a way to make it easier for rich people to dodge taxes.
Well, because of the way the income distribution of the United States has been evolving with more income concentrated among the top One Percent, if you somehow reduce the penalties of underreporting or not filing, the top will just take advantage of it the most, and you would lose a lot of money. So for the median income worker earning about $40,000 or $45,000 a year, it wouldn't make that much of a difference, because they don't pay that much in taxes. But the people at the top pay a lot of taxes because they have so much income. So if you said it's a honor system, that would be a huge hit to the federal government and to many, many state governments. In New York State, we have the highest reliance on income tax in any state, and if the IRS were eliminated or severely restricted, you would see money to the state going way down, and that would immediately translate into less money for AIDS education, teachers getting laid off, and Medicaid payments not being made. Governments need money to do the things that the citizens call on them to do. There will always be debate about whether it's too little, or too much—those are perennial questions about a functioning democracy, but to propose that we eliminate the mechanism for collecting taxes is just a radical step.
Do we have other revenue streams besides income tax?
The other big revenue stream is FICO, or federal insurance contributions. That's the payroll tax that we employees pay half of and employers pay the other half of. That money goes to the Treasury but kind of in a different box. It goes into the trust fund or Social Security or Medicare. Presumably that would continue [without an income tax], and that's automatic. But that money is all spoken for in terms of Social Security checks to retirees and Medicare expenses for people over sixty-five. It's a big and growing part of the government. So in that sense, you would still have that part of the system functioning, but the other part is important, too.
What would happen if no one paid his or her payroll taxes?
You'd see people in the streets—they would be the recipients of Social Security and Medicare. They would be immediately headed toward soup kitchens and starvation. That is their main source of income, and if you cut that off, you would understand the reason why we have that program. It would be evident very fast and painfully, and we'd have to ask if we want most of our elderly to be living from garbage cans.
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