Americans Hid $1 Trillion in Income from I.R.S. in 2003

Some possibly good news from Bloomberg:

Americans avoided paying taxes on a record $1 trillion in income in , according to a new federal government report.The annual study by the Commerce Department’s Bureau of Economic Analysis shows the gap between true income and the amount Americans reported on income-tax filings has increased 35 percent

While this news report plays up the possibility that more people are cheating more brazenly on their taxes, I’m not convinced that this is necessarily the case. The BEA report compared its estimates of how much income people received with what people reported to the IRS as Adjusted Gross Income. But Adjusted Gross Income is usually adjusted in such a way as to reduce it, quite legally and ordinarily, from what the BEA considers your income (an exception to this would be capital gains, but , in the wake of the dot com bust, for all I know there were more capital losses than gains to report anyway). There are new ways to reduce Adjusted Gross Income now that weren’t an option before or were less-valuable; perhaps this is just measuring that.

Take money away from the government now, by tax resistance or tax evasion or tax cuts, and eventually they’ll have to start borrowing, and then start spending less, and the government will get a little bit smaller and hopefully a little less bothersome as a result.

That’s the dream of the tax resister, and the “starve the beast” fantasy of the conservative tax-cut advocate.

Daniel Shaviro thinks we’re mistaken. The big problem is that we naïvely “use… the terms ‘taxes’ and ‘spending’ as proxies for determining the size of government.”

Thus, if the government were to give me $1 billion which I immediately handed back, simplistic idiots would say: “There’s just been a billion dollars of taxes and spending!” I would say that really nothing has happened.

No idle hypothetical — Social Security, for example, has aspects of this, although there is a greater time lag and the cash you get back may not equal, in time-adjusted value, the cash you put back. But this means it’s the aspects of non-equivalence, not the gross cash flows each way, that determine how significant the whole thing is.

The size of government, I’d say, is a concept that, in the budgetary realm, involves trying to quantify the effects of government policy, relative to some baseline that has to be specified, on allocation and distribution — on what we have and who has it. (I limit this to the budgetary realm because issues such as civil liberties operate in different dimensions.)

Once you take this perspective, the utter inadequacy of discerning how much the government is doing from the number of dollars associated with discrete and often offsetting cash flows becomes pretty clear.

Against this background, what does “starve the beast” accomplish even if there are large spending cuts in future years? (Note: there will almost certainly be large tax increases as well.) Point 1: It definitely increases redistribution, by handing vast sums of extra money to older generations at the expense of younger generations. (Older generations were huge net winners even before the whole exercise started.) Point 2: It probably increases government-induced economic distortion, what with the heightened disparity between tax rates in different periods, the instability and risk of fiscal crisis throughout the adjustment process (which may become chronic rather than coming to an end), etc.