In the US alone, we lose around $500 billion in taxes yearly. When you hear about people keeping money in offshore bank accounts to avoid paying taxes, it’s costs the economy a lot more than their individual sum – it’s costing billions of dollars over time.
Offshore bank accounts are one of the ways people avoid paying taxes. There are many other, much more common, strategies people use to avoid paying taxes as well, and it hurts the economy quite a bit. The IRS estimates that as much as 25% of all income earned in the US goes unreported, which means the federal government is missing out on approximately $600 billion each year. Then, when you look at all the different state and local taxes that ought to be paid, but aren’t, it becomes even more shocking.
Incentivize people to pay taxes
A basic principle of economics is that people respond to incentives, so if we want to get people to pay their taxes, we should make it more attractive to do so.
For example, making tax compliance less complicated and more straight forward. If everyone knows what they owe, and it’s paid out of each paycheck every paycheck, there’d be far fewer complaints and disruptions annually. There’s no reason for our tax system to be as complicated as it currently is. If anything it raises the barrier of entry, causing stress and strife. Have it be clear what everyone owes and it becomes the status quo. The middle of April becomes no more complicated than renewing your vehicle registration tabs.
The lack of transparency is one of the many reasons people are loathe to pay taxes. If it were clear where their money was going, people may disagree, but they’d be more willing to be compliant. The obfuscation of why they’re being deducted causes irritation and resentment and leads some to feel they would be more responsible with it than the government.
One way to encourage compliance is by making our tax code more progressive. If you look at countries like Canada, Denmark, France, and Germany, you’ll see that their tax system is much simpler. Although in fairness, Denmark is simple almost to a fault. But there are ways to adopt simpler rules in US.
For example, in the same way that credit cards and various shopping chains offer “rewards.” It’s reasonable to offer tax credits & discounts for those that routinely pay their fair share is enough to keep people incentivized to continue paying their portion.
It starts with education
Taxes get a bad rap because they are a headache. In America, no one should get a raise and think, “What have I done?!”
If we want to get people to pay their taxes, we must provide them with more information. We need to provide a system where they can easily find out how much they owe in a way that’s easy for everyone, not just accountants. Most people don’t have the time or resources to do this. If we can make it so that it’s easy for people to figure out the taxes they owe, then they’re a lot more likely to do so.