Audit them all
Tom Daschle, former Senator and nominee for Secretary of Health and Human Services, didn’t fully pay his taxes. Apparently, Daschle didn’t tell his accountant about a free car service (worth a whopping $250,000) and consulting income (another $88,000) over a three year period. Tax laws are complex and so perhaps Daschle didn’t realize at the time that these things constituted taxable income. Regardless, the perception Daschle leaves is that powerful people don’t pay everything they owe.
In the world of tax compliance, perceptions matter a good deal.
A well-known experiment for the Minnesota Department of Revenue showed that people who believe that tax compliance is high report their own income accurately and pay in full. In other words, people pay what they owe if they believe everyone else is also paying what they owe.
This phenomenon is not unusual to taxes. Willingness to abide by other laws is also influenced by perceptions of whether other people are complying. Some years ago, a colleague and I conducted a study to determine which factors determined whether individuals illegally downloaded and shared copyrighted music files. We found that a strong predictor of downloading and sharing was the perception that other people were flouting the law. Indeed, perceptions of general behavior were better predictors than whether people saw a risk of being caught or facing a significant penalty. People who thought that most people didn’t infringe copyrights were less likely to do so themselves.
News stories at tax time about tax cheats and the IRS cracking down are likely to undermine tax compliance. So, too, stories that Daschle (and others) under-reported are likely to have a negative effect on compliance. Overall, it is likely that most members of Congress and high-ranking members of the Executive branch (and the judicial branch for that matter) faithfully pay what they owe. So here is a proposal: let’s audit them all. The details of their returns need not be released, just final information on whether they owe back taxes. (Some might even be entitled to a refund!) News that Daschle is an exception to the pattern of overall compliance would be good tax news indeed.