Taxes are for the little people
Article published: Monday, November 10th 2008
Opponents of taxation, like the right-wing Taxpayers Alliance, like to characterise their position as a populist one. They’re representing the “ordinary taxpayer”, the common working man and woman, they insist, against the rapacious state which wants to take what they can least afford.
But in fact it seems Leona Helmsley was right. Leona was the miserly billionaire hotel owner who reportedly told her maid – shortly before being arrested for massive tax evasion – that “only the little people pay taxes”. An incredibly interesting piece of research from an IRS economist and a University of Michigan prof backs her up. In the US, at least, the rich cheat more on their taxes than the poor.
Analysing audits of 45,000 people’s tax returns filed in 2001, they found that people earning between $500,000 and $1 million a year understated their pre-tax incomes by an average of 21%; those earning between $50,000 and $100,000 understated their incomes by just 8%. Lower earners misreported even less. Admittedly, the truly mega-rich (those earning over $2m a year) were a little more honest, misreporting by just 11%. Nonetheless they still cheated substantially more than the average wage slave. And as one of the study’s authors suggests, this apparent propensity of the mega-rich to be slightly more honest than the merely filthy rich may simply be an artifact of the mega-rich cheating in cleverer ways:
“I just don’t know whether these audits were able to track down really sophisticated noncompliance or Swiss bank accounts. They may underestimate it (noncompliance) at the top.”
Before we start rounding up everyone in Threshers wearing a rugby shirt and buying champagne, and lining them up against the wall, we should point out that this correlation between wealth and cheating isn’t entirely due to the rich simply being greedier or more dishonest than the poor. To a large degree, it seems, it’s because their income is easier to cheat on. The researchers found that misreporting correlated strongly with different types of income: wage income was more accurately reported (as you’d expect, since it’s largely reported by people’s employers) than income gained from capital or people’s own businesses (which people have to report themselves). And the richer you are, the more of your income is likely to be derived from capital gains and your own business. In other words, the more likely you are to have to report your income yourself (and the more complicated that income is to calculate), the more likely you are to cheat.
But this isn’t the whole answer:
“the variation in type of income received is the major cause of variation by income groups in net misreporting percentages. But there is some divergence; in particular, the NMPs [net misreporting percentages] of those returns with true income between $75,000 and $1,000,000 are all higher than their income source breakdown would suggest.”
In short – even taking into account how you earn your money – the more you earn, the less you want to pay your taxes; and the harder you work to dodge them.
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