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Do Successful Tax Evaders Supply A Positive Externality?

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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 [2],” 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 [3].

Alberto Mingardi, writing over at EconLog, has more [4].  And don’t miss Dwight Lee’s insightful 1997 short essay on this taxing matter [5].