Enforcing Tax Laws
I’ve had a few posts in the last month or two about taxes and honesty. One post showed that the lower the degree of tax enforcement, the lower the share of total income taxes paid by the top 1% and 5% of income earners. Another noted that over time, the correlation between the amount of corporate and individual income taxes paid and enforcement has increased, which seems to indicate that a lot of us are becoming less honest when it comes to taxes.
But how big is the problem of tax evasion? Is there any direct evidence that it gets better or worse in any given year? It’s a tough question to answer because it requires knowing how much income people actually make, not how much they report to the IRS. Being an adorable scamp, I was wandering around the IRS website and located a table showing, among other things, taxable income (from the Statistics of Income or SOI) as a percentage of total income (from the BEA NIPA tables). The data runs from 1950 to 2004.
Personal income from the BEA includes some items that may not be taxable, such as employer contributions to pensions and income from municipal bonds. But for the most part, something that constitutes one type of income constitutes another type of income, and I would expect that as enforcement rises, the share of SOI reported income as a percentage of personal income would rise. Thus, in years when the President is an individual who is more concerned with (and effective in) upholding the law of the land, we would expect to see SOI reported income as a percentage of personal income rise. Conversely, if the President isn’t concerned about corruption or is ineffective in combating it, we would expect to see the ratio fall. Below is a table showing changes in this quantity for some non-randomly selected years.
__Years______Yearly Change
1953 – 1960_______0.32
1960 – 1963_______0.63
1963 – 1968_______1.19
1968 – 1973______-0.69
1973 – 1976______-0.11
1976 – 1980______-0.12
1980 – 1988_______0.42
1988 – 1992______-0.86
1992 – 2000_______1.09
2000 – 2004______-1.51
Ranking Presidents by the yearly change in this ratio over their presidency:
1. LBJ
2. Clinton
3. JFK
4. Reagan
5. Ike
6. Ford
7. Carter
8. Nixon
9. GHW Bush
10. GW Bush
To me, and perhaps this simply reflects my biases, the surprises are with Reagan, Carter, and GHW. I am too young to remember anything about the Carter administration, and I wasn’t in the country at the time anyway, but it seems to me that Carter had a reputation for honesty but ineptitude. I guess in this instance, his ineptitude beat the heck out of honesty. I personally didn’t expect GHW to score so low. Certainly not below Nixon. I also would have expected Ike to score a bit higher from what I’ve read about him. As to Reagan, I wouldn’t have expected him to be a person who would care about enforcing tax laws (or most other white collar type laws), what with his reputation as a tax cutter, and the government being the problem and not the solution and all that.
But an interesting detail…. Adding a little bit to the first table:
__Years______Yearly Change
1953 – 1960_______0.32
1960 – 1963_______0.63
1963 – 1968_______1.19
1968 – 1973______-0.69
1973 – 1976______-0.11
1976 – 1980______-0.12
1980 – 1984______-0.32
1984 – 1988_______1.17
1988 – 1992______-0.86
1992 – 2000_______1.09
2000 – 2004______-1.51
It seems that Reagan’s second term was very different from his first term. In his second term, he became the second biggest tax enforcer in the sample. We all know Reagan went back on his tax cuts (one can point out he raised taxes on different people than those who got the tax cuts) when it appeared that trickle down economics really amounted to little more than piss-on-the-poor-and-run-up-a-deficit in practice. Apparently, he started enforcing tax laws too. Put another way – despite his encroaching senility, the man learned from his mistakes. I hope we are lucky enough to one day be able to say the same about GW.