Monday, April 13, 2015

Malcolm Forgot Who Stands In The Middle: Why American Taxpayers Don't Cheat

Malcolm Galdwell hit the Sunday TV circuit this week in preparation for dreaded Tax Day.  In this video from CNN, he reiterates his standard trope about legitimacy.  He tells us that cheating on our income taxes carries little risk because the IRS audits so few, and the penalties lack teeth.  But, we pay anyway because we think the system is legitimate.

Gladwell needs to read some economics.  Seriously.  Tirole.  Milgrom.  Holstrom.  Something on principal agent problems?!?  Unless you follow the Wesley Snipes strategy and just don't pay, (which lands you in jail,) cheating on your taxes is pretty darn hard.

The United States taxpayer faces a uniquely complex, arcane and ridiculous system.  Gladwell has that one right.  Knowing little about the (vast number of) readers of this blog, I suspect only my mother prepares her taxes unassisted by anything more than IRS instruction documents and a sharp pencil.  No software.  No accountant.

Even minor complications cause the average American to toss her hands up and hire a professional.  Given the vast sums spent advertising by low cost tax prep companies, I'd imagine the vast majority of even "simple" returns have professional help.

(Yes, refund anticipation loans may drive the profits of these shops, but that tells us people have decided that the value of the loan is worth more than the expected value of their ability to cheat successfully.)

So, why is Gladwell delusional?  He ignores the principal-agent problem the tax code manufactures.  We Americans cannot file our own taxes.  Therefore, we cannot cheat without a colluding professional.  That professional's entire career depends on a working relationship with the IRS.  Your tax gal will not let you cheat.  She monitors you, on behalf of the IRS.  And, for this you willingly pay her!

An early Happy April 15!