A Message From Uncle Sam to Taxpayers Near and Far

A Message From Uncle Sam to Taxpayers Near and Far: ‘Don’t You Dare Lie To Me!’

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Are you looking for a fun way to kill a few minutes when you think the boss isn’t looking, and the company’s firewall restricts access to your favorite website? Google the phrase, “the defendant showed no remorse” and see how many hits you get. I witness this phenomenon firsthand almost every day. When the judge pronounces sentence, either after a trial verdict or as part of a plea bargain agreement, the defendants typically show no emotional response.

A large part of this apathy is “monkey see, monkey do.” That’s the demeanor that fictional and quasi-fictional defendants present on TV, so many of my clients assume they are supposed to behave the same way. Others are in shock after they hear an unfavorable verdict, while others are simply overwhelmed by the process and really have only a vague notion about what’s going on. There are some other reasons as well; for example, a number of defendants, despite what they may say during the allocution, are pleading guilty just to “get it over with.”

But a significant number of these individuals truly have little, if any, remorse for their crimes. While this guy is certainly an extreme, and rather chilling, example, others are certainly not far away from him in terms of their emotional reaction. The crux of a forthcoming article for the Boston College Law Review from UNC Law Professor Kathleen DeLaney Thomas is that the government can replicate Sandra Bullock’s icy stare, and that tax cheats can be shamed into voluntary compliance.

The actual number is hard to ascertain, but according to Professor Thomas, the government loses about $250 billion per year to income tax evasion. Even considering the government’s rather large income (more on that later), that’s a lot of money. Despite this financial hemorrhage, only a fraction of income tax returns are audited each year and the penalty for noncompliance is nearly always a percentage of the past-due amount. In order for taxpayers to be shamed into writing larger checks, the scales must be re-balanced.

Traditional Deterrence Theory

No matter what the opinion polls say, most people will commit financial crimes if they feel like they can get away with them. The traditional way to re-balance the scales is to make the possibility of punishment sufficiently real enough, and sufficiently frightening enough, to encourage voluntary compliance. For example, rational people wouldn’t evade $100 of taxes if they had a 50 percent chance of incurring a $400 penalty or a 5 percent chance of incurring a $4,000 penalty.

So why doesn’t the government just audit lots of returns and apply draconian punishments to offenders? It’s not terribly complicated. Audits are expensive and politically unpopular. On the other end, increased penalties would increase litigation costs and reduce voluntary compliance. Instead of walking the sawdust trail, wayward taxpayers would say “catch me if you can.”

In lieu of the traditional approach, Uncle Sam may need to try and psych us out.

The Psychic Cost

Most people have a conscience. We get that funny feeling in the pits of our stomachs when we cheat. The “psychic cost of tax evasion” is the government’s effort to tap into that emotion and magnify it. The idea is hardly revolutionary. In fact, researchers have long identified three empirical factors that influence the decision to fess up.

First, people are more honest when they are made more aware of a latent sense of morality. A Catholic wife may be less likely to cheat on her husband if there are Rosary Beads dangling from the rearview mirror. Professor Thomas cites an interesting study which showed that people were less likely to lie if they were reminded of the Ten Commandments, even if they weren’t churchgoers and even if they couldn’t actually remember any of these edicts. So, the mere contemplation of a vague moral code caused people to be more honest.

The other two fit together. First, there’s the idea that the head-shrinkers call “categorization.” People are more likely to behave immorally if they can label their conduct as something else. A worker may not dream of surreptitiously lifting a $20 bill from the petty cash drawer, but the same person will take $20 worth of office supplies from the cabinet without hardly giving the matter a second thought, even though they are essentially the same thing.

In a similar vein, people are less likely to commit a crime if they perceive that there is a victim who will suffer actual harm. There is an inverse relationship between the victim’s wealth and the individual’s guilt. In other words, the richer he/she/it is, the less we care.

How It Works (Or Doesn’t Work)

These factors should be incorporated into our understanding of the psychic cost of tax evasion. It’s best to use this process to deal with intentional tax evaders, as opposed to those “who employ legal avoidance strategies or take an aggressive, but legally defensible position when it comes to an ambiguous area of the law.” As an added bonus, the psychic cost of tax evasion only imposes a small administrative cost to the government, as opposed to expending resources to audit more taxpayers (a staple of the general deterrence theory).

While this sounds great in theory, practically speaking, what measures should the IRS take to implement these factors? In other words, how do we get this party started? According to Ms. Thomas, the IRS should employ subtle behavioral “nudges” that encourage taxpayers to be more honest.

For example, the government might consider tweaking the tax forms to take advantage of this malleable morality. Instead of simply signing at the bottom, perhaps the IRS should require everyone to sign a detailed, long-form oath, initial every paragraph thereon and affix a wet ink signature. Another idea is to have taxpayers sign the form at the top instead of the bottom, to remind them of their underlying bent toward charity and integrity.

The next two items are a bit trickier. Income tax can be easy to categorize for many people because, quite often, no money changes hands. Lawful Larry may return to the supermarket if the clerk accidentally gave him too much change, but he is still likely to omit the cash he earns from performing odd jobs from his gross income. Professor Thomas suggests that efforts in this area be targeted towards tax preparers and self-employed persons, and that is probably a good idea.

As for convincing people that the government is “victimized” by their underreporting, lots of luck with that. It’s estimated that the government took in over $3 trillion last year, so many people may see a few thousand dollars in lost tax revenue as a penny lodged between the sofa cushions. The government’s best bet may be to remind people of the big picture. I can see the PSAs now. Uncle Sam loses A billion per year in tax revenue, and that money could fill B number of potholes, hire C number of additional park rangers, put D number of additional air marshals in the sky, and so on. If this lawyer thing doesn’t work out, maybe I have a future as a screenwriter.

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