One clue -- it will take 2-3 hours on a computer. Another -- it is something that I have to do, either myself or pay someone to do it for me. Giveaway clue -- must be done by April 15 every year.
The United States is one of the few countries in the world where there is a remarkably high rate of compliance with income taxes. Chicago economist Casey Mulligan reports in a NYT blog entry that 99% of wage and salary income is reported. The economic puzzle, Mulligan notes, is that the odds of being audited are quite low (1%) and the penalty for being caught is quite modest (10% of the under-reported amount). For instance if I received a $10k check on a consulting gig and failed to report it (perish the thought), there is a 1% chance that I would have to pay taxes on the $10k plus a $1000 fine. Assuming taxes are about 40%, that means there is a 99% chance that I get to avoid $400 in taxes and a 1% chance that I have to pay $1400. You never get odds that good at a race track or casino.
Mulligan notes that compliance is much higher for income reported on W-2 forms than for self-employment income or payroll taxes for household help, which is consistent with the odds of getting caught for under-reporting being much higher on the former. Also audits are targeted, not random. For instance, claiming a home office deduction raises a flag.
In all too many other countries, payroll data is not efficiently communicated to the federal government, which makes it much easier for wage and salary workers to under-report income. I have told many of my colleagues in Latin American countries that many of their budget deficit issues would go away if they would adopt the methods of the IRS. Presumably a critical majority of those in power likes things the way they are in those countries, e.g., more discretion in enforcement allows them to reward friends and punish enemies.
What's going on with inflation?
2 years ago
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