Tax evasion: Why do so many Americans cheat?

Tax evasion, nonpayment, and underpayment are important factors in the $300 billion the IRS doesn't collect each year. Why the tax evasion? Lack of enforcement is one reason.

Rapper Ja Rule (left) is seen inside a vehicle outside Martin Luther King, Jr. Courthouse after pleading guilty to federal tax evasion charges, March 22, 2011, in Newark, N.J. Ja Rule admitted he failed to pay taxes on more than $3 million earned between 2004 and 2006.


Benjamin Franklin famously remarked that nothing in this world is certain but death and taxes.

But what would Franklin have said about the tax gap, the difference between the amount of tax due to the federal government and the amount taxpayers actually pay?

This year it’s likely to approach $300 billion, or nearly 15 percent of federal revenues. All told, as many as 30 to 40 percent of Americans won’t pay all of the taxes they owe in 2011.

What’s going on here? Why and how are so many people avoiding what Franklin thought was a certainty?

Much of the gap is the result of good faith mistakes by taxpayers — no surprise given the mind-numbing complexity of the tax code.

But some significant part of the disparity is the result of intentional evasion, non-payment, or underpayment. The question is why. Why are so many Americans willfully and flagrantly violating our tax laws?

The issue is a complex one, but a few key factors can be identified. One is that the norms associated with the duty to pay taxes are surprisingly weak. Most scholars agree that society’s ability to enforce compliance with the law lies less in the government’s power to impose sanctions than it does in the norms by which people direct their lives.

Generally speaking, people refrain from committing crimes not because they fear sanctions if they do, but because they believe it is morally wrong to engage in the conduct prohibited.

In the case of paying taxes, lots of people apparently believe it’s not morally wrong to fail to pay what’s owed. Suspicion of taxes is deeply rooted in our national psyche, going back to the Boston Tea Party of 1773 and the Whiskey Rebellion of the early 1790s.

In the current political climate, taxes have been so demonized that many citizens regard taxation itself as wrongful. And if people believe that taxation itself is wrongful, then it would seem to follow that such people would also believe that the failure to pay taxes is not wrongful.

There is also a widespread belief among many citizens that others in the community — both their neighbors and their leaders — are failing to pay the taxes they owe. And, to some extent, they’re correct. (For example, none other than Treasury Secretary Timothy Geithner admitted that he failed to pay $34,000 in Social Security and Medicare taxes while employed at the International Monetary Fund.)

If people really believe that “everyone else is doing it” – that everyone else is failing to pay the taxes they owe — it’s no wonder they think it’s okay for them to do the same thing.

Many also believe that the tax code is unfair and that tax revenues are being used for unwise purposes.

Whether one is a liberal who thinks that more of the tax burden should be shouldered by the very rich, or a conservative who believes that the government shouldn’t be in the business of supporting the poor, one is likely to be dissatisfied both with the formula that determines who pays what, and with what our government decides to spend the money on.