How big a loss to the Treasury does the "subterranean economy" represent?
The IRS estimates that in 1976 alone as much as $26 billion in taxes was not paid on unreported income of $135 billion. About $35 billion of that was from drug traffic, gambling, prostitution and other illegal sources, but $100 billion was legal income. If people had paid that $26 billion, the government's budget deficit for fiscal 1977 would have been reduced by 58 percent. Yet, as the Roper poll suggests, many think it's American to cheat on taxes.
Which problem is worse: failure to file returns or under-reporting income?
Of the $100 billion of income from legal sources that wasn't reported, about $27 billion was from non-filers, but $73 billion was from people who under-reported. So under-reporting is much more of a problem.
Who doesn't file a tax return?
In 1972, the year we covered in our study, 26 percent of the non-filers had eight years or less of education, but 22 percent had been to college. We found that 52 percent had incomes of less than $5,000. Many were no doubt hurting themselves because, if they had any taxes withheld, they probably had a refund coming. On the other hand, 12 percent had between $10,000 and $20,000, and four percent had incomes over $20,000. Of those who did not file 17 percent were self-employed.
Who are the under-reporters?
Income derived from self-employment was under-reported extensively—only about 60 to 64 percent of it was reported in 1976, whereas 97 to 98 percent of all the income derived from wages and salaries was reported. The self-employed include business people, skilled craftsmen who are independent contractors, and professionals, such as lawyers, doctors and architects. Moonlighters earned an estimated $4 billion that was not reported.
What is bartering?
It's an exchange of goods and services, instead of income. For example, a plumber has his teeth fixed and the dentist receives a credit for plumbing services. A lawyer represents an artist and gets a new painting for his wall. Both the dentist and the lawyer should report these things as income, but increasingly people are using the barter system to avoid paying taxes. We have no idea how much money the government is losing because of it.
What is the solution?
The IRS must get better criminal enforcement strategy. We think it focuses too much on people who have reported their income but may have tried to overstate their deductions. These can be checked by computer. It takes a lot more time to send people out to go over somebody's books and records for unreported income. But the IRS is auditing fewer people every year. In 1974, they audited about 2.4 percent of all tax returns filed. In 1980, they estimate they will be down to about 2.1 percent, because their budget has been cut. We understand the Administration's desire to balance the budget, but we're talking about $135 billion.
Is tax cheating growing?
There are no hard statistics, but we believe that under-reporting is on the rise. My feeling is that because inflation is pushing people into higher income tax brackets, more people are looking for ways to cheat on their tax returns. The opinion polls suggest that. But our system is one of the few in the world where people voluntarily report their income. The whole system is endangered if taxpayers think there are a lot of other people out there who aren't paying their fair share. If this continues, we're going to find people with less confidence in government because it can't deal with this problem—and a growing malaise in the country.
Outraged by high taxes, some citizens are campaigning for tax reforms like Proposition 13—while others have quietly, and illegally, taken matters into their own hands. According to a recent Roper poll, the average American now believes that 30 percent of his fellow citizens either cheat on their taxes or don't file returns at all. Ominously, this cynical view may be close to the truth. The IRS and the General Accounting Office—a Congressional watchdog over the federal government—recently disclosed the results of an investigation into the growing "subterranean economy" of tax dodgers and evaders: The U.S. Treasury is losing billions of dollars every year. Richard L. Fogel, 35, the associate director of the GAO who headed the study, explained the findings to Clare Crawford-Mason of PEOPLE.