For the sake of Minnesota taxpayers, I hope that Geoffrey Hickman gets the maximum 19 months when he comes up for sentencing in early December.
Hickman is the airline pilot who was recently convicted of five felony counts of tax evasion. I don’t have a personal grudge against him, but punishing tax fraud is important to our society’s economic well being.
Simple fairness is one reason someone convicted of defrauding us of $50,000 should do hard time. If some punk stole five $10,000 cars, he would likely get much more than 19 months. Why should a theft of an equivalent amount from the public treasury bring softer treatment?
We have doubled the number of people in prison in the last decade or so. Most inmates are doing time for drug or property crimes. A $50,000 theft by a high-income white guy should not be treated differently.
In the long run, however, the economic consequences of maintaining an effective tax collection system are of even greater importance than fairness. A stiff sentence would advance economic efficiency.
In a democracy such as ours, elected officials determine that government provides certain public services or makes certain transfer payments. These are funded with taxes that are also determined by elected representatives.
Few people are eager to pay taxes, but most of us recognize we live better lives and our economy is more productive with a prudent level of public goods and services than with none. The cost must be paid somehow, and ultimately some individual has to pay every tax — no matter how well camouflaged its incidence.
A society where most citizens view the tax system as reasonably fair and most comply honestly in paying taxes usually produces more goods and services than societies where tax evasion is rampant and government has to spend inordinate amounts of money to collect taxes.
The United States, Canada and a handful of nations in northwest Europe are global anomalies in that voluntary tax compliance is relatively high. Tax cheating is generally much more common in France, Italy, Spain, Portugal, Greece, Eastern Europe, Latin America, Africa and Asia. That hurts the efficient operation of these economies.
In countries where tax fraud is common, businesses spend inordinate amounts of time keeping double sets of books. They devise elaborate business structures to hide income or sales or value added — whatever is taxed — from the government.
Once a significant number of businesses do this, there are competitive pressures for everyone to do it. Companies that are honest in their tax returns have higher costs than those that cheat. Governments must devote inordinate resources to tax enforcement, and opportunities for corruption of public officials are widespread.
The same is true for individuals. The more widespread tax cheating is in a culture, the harder it is for any single individual to be honest. When both businesses and households cheat on tax returns, the tax burden falls on a smaller subset of the population, which for one reason or another has less opportunity for fraudulent tax returns. Or, government chooses taxes that are hard to evade but generally are regressive and take a much bigger bite from the poor than from the wealthy.
The cost in economic output of a corrupt and inefficient tax system can be very large. Governments are starved of resources needed to provide necessary public goods. High levels of private sector resources go into evasion. Even high-minded individuals find it difficult to be honest when most others apparently are not.
The French army used to shoot those who ran from battle to “encourager les autres,” that is, to hearten the rest. This was brutal. But harsh punishment of those who ran made the army a more effective fighting force and minimized the number of soldiers killed.
The same principle applies to punishing tax fraud. As long as taxpayers know that most others are honest and that fraud will be punished, most will be content to submit honest returns themselves. But if highly publicized cheats get off with a slap on the wrist, it sends a message that only chumps pay taxes. A downward spiral is touched off that is hard to reverse.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.