Shame tax evaders? Not so fast.
The annual federal tax gap in the United States is $400 billion. That means Americans, collectively, pay $400 billion less to the IRS than they should every year. To close this gap, an accounting professor and a law professor recently suggested that the IRS begin shaming people who avoid paying taxes by publishing and publicizing their names – similar to the strategies used by some law enforcement officials that publish the names of “Johns” arrested for soliciting sex.
Enforcement through shaming could attack all forms of tax abuse. These include high-income and corporate taxpayers who take artificial losses to offset taxable gains, as well as smaller-scale abuses such as the widespread practice of individuals illegally claiming home office deductions.
A few states already do this, including California (O.J. Simpson is on the list), Delaware, Wisconsin, and our own home state of Illinois, which publishes an online list of delinquent taxpayers who owe at least $1,000. We’ve blogged on this site about the whether more enforcement, which in the case of taxes would mean a higher audit rate, is necessary? Shaming is an idea with some popularity, at least among academics (see the abstract of this forthcoming article in the Tax Law Review).
As a possible nudge, shaming does sound promising. On the other hand, shaming is probably not a silver bullet. The effectiveness of shaming depends on the tax evaders’ view of the IRS – and the political process more generally – as a legitimate institution. Personal experiences with tax bureaucrats matter too. The less someone respects the IRS, the more someone questions the idea of paying taxes, the worse an afternoon someone had in a tax office, or the more cynical someone is toward government lawmaking or elections, the less likely a shaming strategy will be successful.
Tax compliance may also be dependent on personal traits like integrity. Oscar Vela, a Ph.D. candidate in the economics department here at Chicago and who is writing a dissertation on tax compliance, argues that people who work jobs where integrity is large factor in success are more likely to pay taxes. If the implications from Vela’s work are true, it is also hard to see why shamed tax evaders will suddenly become willing tax compliers. Not surprisingly, data on tax evaders is hard to come by. But speculating (perhaps wildly), it’s hard to believe that tax evaders are people who hold the American government in high esteem, or have a large reservoir of personal integrity. So unless we get a better sense of who these people, using shaming to close the tax gap makes a better academic paper than an actual public policy.