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Do Successful Tax Evaders Supply A Positive Externality?

Here’s a letter to the Washington Post:

On Wednesday, 51 governments agreed to share financial information in order to reduce tax evasion (“51 countries sign deal in tax evasion crackdown,” Oct. 30).  Britain’s Chancellor of the Exchequer, George Osborne, roundly approves, proclaiming that this new treaty “strikes a blow on behalf of hard-working taxpayers.”

Not so fast.  While this treaty unquestionably strikes a blow on behalf of tax-collectors such as Mr. Osborne, it’s less obvious that this treaty helps taxpayers.  Consider the U.S.: In 31 of the 67 post-war years from 1946 to 2013, Uncle Sam’s budget deficit rose (or budget surplus shrunk) when his tax receipts increased.*  This fact means that Uncle Sam almost as often as not responds to each dollar of additional tax revenue by increasing his spending by more than a dollar – thus imposing a heavier tax burden on future taxpayers.

Of course, this reality doesn’t prove that governments are institutionally prone to treat a rise in tax receipts as an invitation to hike spending excessively rather than to lower the tax burden on non-evaders.  But it should give serious pause to those who blithely assume that more revenue extracted from tax evaders will necessarily reduce the burden of taxes borne by non-evaders.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

* See Table 1.1 here.

Alberto Mingardi, writing over at EconLog, has more.  And don’t miss Dwight Lee’s insightful 1997 short essay on this taxing matter.


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