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Stanford Law Professor Reveals The Most Pervasive Forms Of Tax Evasion And It's Not What You Would Think

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These questions originally appeared on Quora - the knowledge sharing network where compelling questions are answered by people with unique insights.Answers by Joe Bankman, Professor of Law and Business, Stanford Law School, on Quora.Q: How could the federal government and state governments make it easier to fill out tax returns?

A: Individuals who don't own businesses spend tens of billions of dollars each year (in fees and time) filing taxes.  Most of this is unnecessary.  The government already has most of the information it asks us to provide.  It knows what are wages are, how much interest we earn, and so on. It should provide the information it has on the right line of an electronic tax return it provides us or our accountant.  Think about VISA. VISA doesn't send you a blank piece of paper each month, and ask you to list all your purchases, add them up and then penalize you if you get the wrong number.  It sends you a statement with everything it knows on it.

We are one of the only countries in the world that makes filing so hard. Many companies send you a tentative tax return, which you can adjust. Others have withholding at the source, so the average citizen doesn't file anything.

California adopted a form of the above -- it was called ReadyReturn. 98%+ of those who tried it loved it. But the program was bitterly opposed by Intuit, makers of Turbo Tax. They went so far as to contribute $1 million to a PAC that made an independent expenditure for one candidate running for statewide office. The program was also opposed by Rush Limbaugh and Grover Norquist. The stated reason was that the government would cheat taxpayers. I believe the real reason is that they want tax filing to be painful, since they believe that acts as a constraint on government programs.

Q: What are the most popular / pervasive forms of tax evasion?

A: Most pervasive form of tax cheating is to sell goods or services for cash -- and not report the cash. Study after study shows that the effective tax rate on cash sector income is less than 50%.

During certain periods, such as the 1990's and early 2000's, corporations evaded tax through tax shelters. Here's a representative shelter that Wells Fargo used: they purported to "buy" subway cars and then lease the cars back to the subway system. The deal was structured to leave the transit system in the same place it always had been, but to give the bank tax depreciation on the cars.

At one point, most transit cars in the Bay Area were ostensibly "owned" by corporate taxpayers (e.g., CalTrain, Metro, AC Transit)...

That shelter was held not to work, but where there is a will there is a way and shelters will always be with us.

Q: Would a simple flat tax make sense for the U.S.?

A: What people call a flat tax consists of three separate elements. One is a leveling of rates, so that instead of, save 5 rate brackets we have only 1 (two if you count a zero tax bracket). Leveling rates would not simplify much and would worsen income inequality. One of the "inventors" of the flat tax, Stanford economist Robert Hall, actually favors keeping more than one rate bracket, as do I.

The second feature of a common flat tax is to eliminate deductions, credits and the like. Some provisions (like favorable treatment of employer provided health insurance) sound good but are ineffective and inefficient. On the other hand, I like some provisions, such as the charitable deduction. On the whole, I do think we ought to radically prune this part of our law. (But someone speaking at my class today, economist Jim Hines of Michigan, has an interesting paper arguing the opposite).

The final feature of a common flat tax is to tax consumption, rather than income. I like this feature of the flat tax, and feel a progressive consumption tax is more efficient than an equally progressive income tax.

So would a well-designed flat tax work here -- sure. But there are a lot of "well-designed" plans that could improve our tax system. I don't think we are close getting a flat tax, and so don't spend any time any more writing on that.

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