A Cost/Benefit Analysis of Tax Refusal

I wrote that I hoped periodically to tally up the interest, penalties, and miscellaneous costs of my self-employment tax resistance technique as a way of trying to determine whether the benefits are worth the costs.

But it’s not a simple matter to determine what the costs are. You can’t simply add up all the penalty & interest values because a unit of money doesn’t have a constant value over time.

For example, if I refused to pay $100 in taxes in and then the IRS seized $100 from me in , we wouldn’t be “even” because $100 was worth more in .

The IRS adds a generous (to them) interest percentage, and penalties to boot, to any delinquent payments, so as to keep the money value decay from working to the advantage of folks like me. But, even so, I’m economically naïve enough that I’m not sure how best to make the calculation.

My best guess is to start by trying to find some more-or-less fixed percentage (average rate of inflation? typical savings account interest rate?) over the span in which I’ve been resisting, and use that as the money-value-decay coefficient, or, seen from the other perspective, the increase in dollar-denominated-value over time of non-relinquished assets. Let’s call this d, such that a 4.0% annual rate makes d=0.04.

So if I pay the IRS $100 in , in that makes me behind by $100×e2d (if d=0.04, $108.33). If, on the other hand, I don’t pay, the IRS charges a penalty of ½% monthly (on the original assessed tax only) and some interest percent i (say, 6% = 0.06). That comes to, hmmm… something in the neighborhood of $100×e2×0.06 + 100×.005×2×12 = $124.75. So if they seize that, I end up losing not $24.75 more than I would have if I’d just coughed up the $100 from the get-go, but $24.75−$8.33 = $16.43.

(It occurs to me that those tax resisters who apply to the War Tax Resisters Penalty Fund for reimbursement of interest and penalties can actually end up ahead of the game this way!)

This calculation can get really complicated, since estimated taxes are due quarterly, penalties are assessed at various times, the interest really applies to both the compounding original amount plus the penalties as they accumulate, and neither d nor i are constant. Also, the penalties have a cut-off point at 25% of the tax after which they stop accumulating, so I have to remember to figure that in.

There’s also some percentage chance that they’ll never collect. Surprisingly frequently, the IRS just drops the ball, even if they know there’s a tax liability and they know where to find the assets. If they fail to collect, the costs of this method go from significant to less-than-zero. Unfortunately, for me anyway, this is something I’d only know in retrospect.

To the costs, I need to add some additional ones that are hard to predict: If the IRS freezes my checking account and I have checks outstanding, they’ll bounce and I’ll need to scramble to make sure my bills get paid. This may involve charges for wiring money, bounced check fees on both ends of the transaction, and that sort of thing. Possibly, the financial institution that gets the levy will try to pass the expenses of dealing with it on to me (I haven’t read the fine print, but it wouldn’t surprise me).

And this reminds me that these calculations will be different for people in different situations. For some people, the costs of bounced checks or frozen assets could be severe — maybe essential services would be cut off or this would cause conflict with a landlord or legal problems or would lead to other penalties. On the other hand, for someone who has few assets, or at least few that are in the form of accounts or paychecks with their social security number attached to them, the likelihood that the IRS will fail to seize anything increases.

There isn’t going to be a one-size-fits-all cost/benefit analysis for this sort of thing.

If I want to cover all the bases, I should add that this is also costing me some time — for instance, time I’m spending to come up with calculations like these — and that I could conceivably be doing something better with my life than reading IRS regulations and trying to remember compound interest equations.

Okay… on to the benefits. What are some of the things I gain from this form of tax resistance?

I say “this form” because I’m using multiple tax resistance techniques:

  1. I’ve reduced my income and made efforts to qualify for a variety of tax deductions and credits so as to legally eliminate my federal income tax liability.
  2. I’ve made some lifestyle changes (reducing my use of gas-powered vehicles, home-brewing beer) to legally lower my federal excise tax liability.
  3. I’ve stopped paying self-employment tax, so as to illegally resist that tax.

Only technique #3 puts me at risk of the costs I’ve been trying to estimate above. For the other two techniques, I’m confident that the benefits exceed the costs, though I haven’t done anything formal to try to quantify this.

What are the benefits I get from exercising technique #3? Off the top of my head:

  • Making the tax collector seize the money from me, rather than handing it over voluntarily, more authentically represents the sort of relationship I feel we have.
  • I reduce that horrible feeling of complicity I used to feel when I would write a check to the U.S. Treasury.
  • By resisting taxes in this way, I’m joining in solidarity with other tax resisters who are taking such risks.
  • I’m learning first-hand about the IRS tax enforcement techniques, which is something I can share here at The Picket Line for the benefit of other resisters and potential resisters.
  • The government may end up with less money in the end, and therefore less to spend on its nefarious activities, than it would if I just handed over the money voluntarily. That is to say, even if they seize extra money from me in penalties and interest, this may not cover the costs of enforcement.

This last point is going to need its own break-down. It’s hard to estimate how much it costs the IRS to track down and seize delinquent taxes, but we do have some data points:

  • The Taxpayer Advocacy Panel issued a report last year that said it costs the IRS between 45¢ and $4.79 every time they send out one of their “Balance Due” notices, and that “the cost of administering a tax module through a cycle of several notices is significantly higher.”
  • When the IRS started outsourcing their collection process to private collection agencies, these agencies demanded 22–24% of the take to cover their expenses and profits. And note that the IRS only outsources the easy cases, in which there aren’t disputes over the tax due, in which nobody is trying to negotiate an Offer in Compromise, and in which persuasion and not levies & liens are the tools of the trade.

My resistance might also encourage others to take up tax resistance, or might discourage people who ordinarily pay taxes only because they perceive it as the social norm. It’s also true that if there weren’t people like me who decline to pay, the IRS would not have to spend any money on its complex collections apparatus, so I help contribute in a small way to that larger drain on their budget. But at this point things become so speculative that I don’t care to try to attach a dollar value.

I should look at whether some of the benefits I listed above could be achieved at a lower cost. For instance, by resisting taxes illegally I stand in solidarity with other tax resisters who are defying the law. But I would be resisting just as illegally by refusing to pay $100 as by refusing to pay $1000, at less risk.

At the end of this process, I should have an expected cost on one hand, and a set of benefits on the other, and I should be able to judge “is it worth it?” That is: worth it compared to what else I could have gained at that cost. Could I have done just as well for me, my conscience, and the world at large by donating that much money to charity? Could I have gotten a better “return on investment” by doing symbolic, partial tax resistance, and using my time, money, and energy in other ways than in a frontal assault on the IRS?

For the reasons I’ve given above, I think it’s not going to be that easy. The costs are very hard to determine precisely ahead of time, and even in retrospect. The benefits are even harder to quantify. It’s going to come down to gut feel, informed by, but not determined by figures and equations.