Tuesday, September 6, 2016

WSJ - could reducing tax cheating close the deficit? Me - has anyone figured out 1+1 yet?

WSJ - could reducing tax cheating reduce the deficit? Short answer is duh:

The most recent estimates for the size of the “tax gap” (basically, how much tax revenue should be collected but isn’t) are for tax years 2008-2010. Thanks to the financial crisis, both the economy and the deficit looked especially bad then — incomes were depressed and a very expensive stimulus package had just passed — so it’s not a perfect analogy to today’s world. Rather than looking at the raw number of tax dollars that went unpaid those years, then, I’m going to rely on the percent of tax dollars that went unpaid, and apply that figure to today’s fiscal situation.

In each of those years, an average of 81.7 percent of taxes were paid “voluntarily and timely.” Another 2 percent were ultimately collected late and after enforcement actions, which brings the “net compliance rate” to 83.7 percent. These estimates of compliance rates have been relatively stable over the last three decades.

The Congressional Budget Office’s detailed revenue estimates show that about $3.083 trillion in tax revenues will be collected in fiscal year 2016 (counting only individual income, corporate income, payroll, excise, estate and gift taxes). If we assume that figure represents only 83.7 percent of what’s legally owed, that means the real total tax liability is closer to $3.684 trillion.

It also suggests we’re leaving about $600 billion on the table in uncollected tax revenue ($3.684T -$3.083T = $600B). The budget deficit for 2016, according to the C.B.O., is $590 billion.

That’s right: The estimated amount of dollars lost to tax cheating is almost exactly equal to the size of the annual deficit.

I'll go one further:

I'd bet that, from a savings/consumption perspective, something approaching 80-90% of tax-evaded money is going into savings. Which means there's $600 billion too much in savings being generated in the US each year.

(It's "too much" because real rates are negative, so there must be too much savings for the level of investment demand.)

If the government didn't use this $600B to reduce the deficit, which would be stupid to do when real borrowing rates are negative, but instead spent it on infrastructure and capital generation with a positive 30-year rate of return, that would mean $600B/y less in savings, $600B/y more in government "consumption", and thus $600B/y more in annual capital generation.

That would fix the whole secular stagnation problem, no?

Let me know when I'm taking an economics class that makes this point.

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