The Truth About Tax Cheating

Tax Gap Chimera

by Bruce Bartlett

Posted 02/13/2007 ET

Human Events.com

According to press reports, Democrats in Congress are planning a major effort to reduce the so-called tax gap. This consists of money owed to the federal government but not paid. According to the Internal Revenue Service, in 2001 the gross tax gap was $345 billion, which fell to $290 billion after enforcement efforts. This suggests that about 14 percent of all taxes that are owed are not paid annually -- a figure no higher today than in the 1980s.

These figures are primarily for individual income and payroll taxes -- the IRS has not updated its research on corporate tax compliance for decades. One reason is that the line between tax evasion and legal tax avoidance in the corporate sector is very, very murky. For many corporations, it's not worth the bother to evade taxes when there are so many legal tax avoidance opportunities available.

To a certain extent, this is true of individuals, as well. When I do radio shows, I often hear from callers who believe their taxes are much too high. But when I question them about whether they participate in their employer's 401(k) plan, whether they are contributing the maximum to an Individual Retirement Account, whether they have considered investing in tax-free municipal bonds, whether they are taking advantage of the Earned Income Tax Credit and other legal methods of tax avoidance easily available to all taxpayers, very often the answer is "no." In effect, many taxpayers are voluntarily paying more taxes than necessary.

If a taxpayer truly wished to avoid paying income taxes altogether, he could probably arrange his affairs to make that possible. But that would require a lot of work that might not pay off in tax savings or actions that would reduce his overall income. For instance, someone in the 15 percent tax bracket could buy municipal bonds to avoid paying any taxes on his interest income, but this would make no economic sense because the spread between interest rates on corporate and municipal bonds is greater than 15 percent. Lately, the spread has been about 22 percent. Therefore, it only makes economic sense to buy municipals if one's marginal tax rate is greater than 22 percent.

Yet many ordinary Americans still cheat on their taxes, mainly by not reporting income. And almost all of that comes from business activities. According to the IRS, only 8 percent of the individual income tax gap came from unreported wages, salaries and tips. Just 5 percent came from unreported capital gains, and another 5 percent from unreported pensions, annuities and IRA distributions. Less than 3 percent of the tax gap was accounted for by unreported interest and dividends.

By contrast, 35 percent of the tax gap came from unreported business earnings by non-farm sole proprietors, and another 13 percent resulted from unreported partnership income. This suggests that the best way to evade taxes, should one choose to go that route, would be to start your own business. It's just too easy to hide income and overstate business expenses in ways that are almost impossible to detect. And since most small businesses don't make much money even if they accurately report all their income and expenses, it isn't worth the IRS's time to go after them.

In practice, the IRS has to concentrate its resources on areas where there is the greatest potential revenue yield, which may not be where the greatest amount of evasion exists. For example, a high percentage of alimony income goes unreported, but the total amount of alimony paid is so small that the aggregate dollar amount of evasion is tiny. The same is true of unreported state tax refunds and unemployment compensation. Indeed, the relatively high level of unreporting from these income sources may be due largely to taxpayer ignorance that such income is in fact taxable.

The point is that closing the tax gap in ways that will yield significant revenue to the government is much harder than generally believed. Most people think the IRS just needs to audit more people. But unless it has good reason in advance to believe that fairly substantial revenues will result from an audit, it could easily be counterproductive. The increased deterrent effect could be more than offset by taxpayer complaints that will result in efforts by Congress to tie the IRS's hands and cut its budget.

In the end, there is really no pot of money that Congress can use to pay for more spending. To get more than a small part of the tax gap will require draconian enforcement efforts that will lead to a taxpayer backlash and a quick retreat by Congress and the IRS. It may be that we simply have to accept a certain amount of tax cheating as part of the price we pay for a free society.

Mr. Bartlett is a nationally syndicated columnist and author of "Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy."

Pat Buchanan: Putin Has a Point

Lately I've been posting more & more op-ed articles by Pat Buchanan. I never thought I'd see the day when Buchanan's was the most sane & objective voice on U.S. foreign policy in the American mainstream media. But that day is here, folks!...

Does Putin Not Have a Point?

by Patrick J. Buchanan

Posted 02/13/2007 ET

Human Events.com

"A soft answer turneth away wrath," teaches Proverbs 1:15.

Our new secretary of defense, Roberts Gates, seems familiar with the verse. For his handling of Saturday's wintry blast from Vladimir Putin at the Munich security conference was masterful.

"As an old Cold Warrior, one of yesterday's speeches almost filled me with nostalgia for a less complex time," said Gates, adding, "Almost." A former director of the CIA, Gates went on to identify with Putin: "I have, like your second speaker yesterday ... a career in the spy business. And I guess old spies have a habit of blunt speaking.

"However, I have been to re-education camp, spending the last four-and-a-half years as a university president and dealing with faculty. And as more than a few university presidents have learned in recent years, when it comes to faculty it is either 'be nice' or 'be gone.'"

Gates added he would be going to Moscow to talk with the old KGB hand, who will be retiring as Russia's president around the time President Bush goes home to Crawford. Excellent.

For one of the historic blunders of this administration has been to antagonize and alienate Russia, the winning of whose friendship was a signal achievement of Ronald Reagan and George H.W. Bush. And one of the foreign policy imperatives of this nation is for statesmanship to repair the damage.

What did we do to antagonize Russia?

When the Cold War ended, we seized upon our "unipolar moment" as the lone superpower to seek geopolitical advantage at Russia's expense.

Though the Red Army had picked up and gone home from Eastern Europe voluntarily, and Moscow felt it had an understanding we would not move NATO eastward, we exploited our moment. Not only did we bring Poland into NATO, we brought in Latvia, Lithuania and Estonia, and virtually the whole Warsaw Pact, planting NATO right on Mother Russia's front porch. Now, there is a scheme afoot to bring in Ukraine and Georgia in the Caucasus, the birthplace of Stalin.

Second, America backed a pipeline to deliver Caspian Sea oil from Azerbaijan through Georgia to Turkey, to bypass Russia.

Third, though Putin gave us a green light to use bases in the old Soviet republics for the liberation of Afghanistan, we now seem hell-bent on making those bases in Central Asia permanent.

Fourth, though Bush sold missile defense as directed at rogue states like North Korea, we now learn we are going to put anti-missile systems into Eastern Europe. And against whom are they directed?

Fifth, through the National Endowment for Democracy, its GOP and Democratic auxiliaries, and tax-exempt think tanks, foundations and "human rights" institutes such as Freedom House, headed by ex-CIA director James Woolsey, we have been fomenting regime change in Eastern Europe, the former Soviet republics and Russia herself.

U.S.-backed revolutions have succeeded in Serbia, Ukraine and Georgia, but failed in Belarus. Moscow has now legislated restrictions on the foreign agencies that it sees, not without justification, as subversive of pro-Moscow regimes.

Sixth, America conducted 78 days of bombing of Serbia for the crime of fighting to hold on to her rebellious province, Kosovo, and for refusing to grant NATO marching rights through her territory to take over that province. Mother Russia has always had a maternal interest in the Orthodox states of the Balkans.

These are Putin's grievances. Does he not have a small point?

Joe Lieberman denounced Putin's "Cold War rhetoric." But have we not been taking what cannot unfairly be labeled Cold War actions?

How would we react if China today brought Cuba, Nicaragua and Venezuela into a military alliance, convinced Mexico to sell oil to Beijing and bypass the United States, and began meddling in the affairs of Central America and Caribbean countries to effect the electoral defeat of regimes friendly to the United States? How would we react to a Russian move to put anti-missile missiles on Greenland?

Gates says we have been through one Cold War and do not want another. But it is not Moscow moving a military alliance right up to our borders or building bases and planting anti-missile systems in our front and back yards.

Why are we doing this? This country is not going to go to war with Russia over Estonia. With our Army "breaking" from two insurgencies, how would we fight? By bombing Moscow and St. Petersburg?

Just as we deluded ourselves into believing this war would be a "cakewalk," that democracy would break out across the Middle East, that we would be beloved in Baghdad, so America today has undertaken commitments, dating to the Cold War and since, we do not remotely have the resources or will to fulfill. We are living in a world of self-delusion.

Somewhere in this presidential campaign, someone has to bring us back to earth. The halcyon days of American Empire are over.

Disengagement in Iraq, not withdrawal

To help Baghdad, let it fend for itself

Edward N. Luttwak

February 6, 2007 | International Herald Tribune

The sooner President George W. Bush can get his extra troops for a "surge" in Iraq, the sooner he will be able to announce that all U.S. troops are coming home because of the inevitable failure of the Iraqi government to "live up to its side of the bargain."

In fact, in the run-up to the surge proposal, it is unlikely that there was any real bargaining before Prime Minister Nuri Kamal al-Maliki was induced to issue promises — particularly in terms of government troops taking on Shiite militias — that he cannot possibly fulfill. Maliki, it seems, simply agreed to whatever was asked of him, to humor the White House and to retain American support for a little while longer.

For the Iraqi Army and police to disarm the Shiite militias, the prime minister would have to be a veritable Stalin or at least a Saddam Hussein, able to terrorize Iraqi soldiers into obedience. Maliki, of course, has no such authority over Iraqi soldiers — indeed he has little authority over his own cabinet, the members of which mostly represent sectarian parties with militias of their own.

Actually the situation is even worse than that, because only the Kurdish militias unfailingly obey their political leaders — one is the president of Iraq no less, Jalal Talabani — while, for the rest, it may be more true to say that Iraqi militias have political leaders to represent their wishes. The largest and most murderous of the Shiite militias, the Mahdi Army, which is invariably described as belonging to the truculent cleric Moktada al-Sadr, actually is divided under local commanders, some of whom obey Sadr some of the time. In sum, the most that Maliki can do is to not interfere when U.S. troops fight militias.

Nor can the Iraqi leader fulfill his other major promise: to lead a new effort to reconcile the warring sects of Iraq. He is not another Gandhi, but rather a leader of the fiercely sectarian Dawa Party. It is very much as a militant Shiite that he speaks out. It would be remarkable if Maliki could even reconcile with his Shiite rivals, let alone the Sunni insurgents.

Fortunately there is a promising, long- term policy waiting for Bush whenever he decides to call off his surge: disengagement. I don't mean a phased withdrawal, let alone total abandonment.

Rather it would start with a tactical change: American soldiers would no longer patrol towns and villages, conduct cordon-and-search operations or man checkpoints. An end to these tasks would allow the greatest part of the troops to head home. The remaining U.S. forces would hole up within safe bases in Iraq to support the elected government, deter foreign invasion, dissuade visible foreign intrusions, and strike at any large concentration of jihadis that should emerge. This would mean that U.S. personnel could not remain embedded in large numbers within the Iraqi Army. At most, the Americans would operate training programs within safe bases.

What would be the result of disengagement along these lines? First, it would not be likely to increase the violence afflicting Iraqi civilians. The total number of U.S. troops in Iraq is so small, and their linguistic skills so limited, that they have little effect on day-to-day security. Nor have they really protected Iraqis from one another.

Disengagement should actually reduce the violence. U.S. power has been interposed between Arab Sunnis and Arab Shiites. That has relieved the Shiite majority of responsibility to such an extent that many, notably the leaders of the Mahdi Army, feel free to attack the U.S. and British troops who are busy protecting their co-religionist civilians from Sunni insurgents. For many Arab Sunnis, on the other hand, the United States must be the enemy simply because it upholds the majority of the heretical Shiites.

Were the United States to disengage, both Arab Sunnis and Arab Shiites would have to take responsibility for their own security, as the Kurds have been doing all along. Where these three groups are not naturally separated by geography, they would be forced to find ways to stabilize relations. That would most likely involve violence as well as talks, and some forcing of civilians from their homes. But this is happening already, and there is no saying which group would be most favored by a reduction of the U.S. footprint.

One reason for optimism on that score is that the violence itself has been separating previously mixed populations, reducing motives and opportunities for further attacks. That is how civil wars can burn themselves out. In any case, it is time for the Iraqis to make their own history.

Iran: Wrong war, wrong time

Wrong war, wrong time

Milt Bearden

Tuesday, February 6, 2007 | The International Herald Tribune

As the drumbeat for war with Iran grows more insistent, the search for a "casus belli" compelling enough to calm a newly assertive Congress and convince an increasingly questioning American public intensifies. Themes of justification for such a war fluctuate between fears of a nuclear-armed Tehran and the "smoking gun" of Iranian involvement in America's misadventure in Iraq.

But before Americans get sent off to a third war in a Muslim country, it is worth recalling that in the past century, no nation that has started a major war has ended up winning it. Moreover, in the last 50 years, no nationalist-based insurgency against a foreign occupation has lost — a lesson that I learned personally when, beginning in 1986, I found myself in Pakistan, managing the CIA effort to aid Afghan resistance fighters battling Soviet troops.

This point is best illustrated by looking at the wars the Cold War enemies waged by proxy in Korea, Vietnam and Afghanistan.

When the North Koreans attacked South Korea in June 1950, the United States found itself at war. From the outset, the North Koreans received aid from China and combat advisers from the Soviet Union. But all external players in that war — the United States, the Soviet Union, the Chinese Communists — understood that direct confrontation between them was to be avoided. When President Harry Truman's commander in Korea, General Douglas MacArthur, decided to go against the new "rules" by calling for air strikes against China in 1951, Truman refused, concerned that such action could bring the Soviet Union into the war. When MacArthur publicly criticized the president's decision, Truman fired him. America lost more than 40,000 dead in Korea in a proxy war with the Soviet Union and China.

The same rules applied in Southeast Asia, where the supply lines to the North Vietnamese and the Viet Cong had their origins in China and the Soviet Union. Despite the fact that there was a Soviet or Chinese hand in American casualties, Washington never seriously considered striking back at either nation. America lost more than 58,000 killed in Vietnam in its continuing proxy battle with China and the Soviet Union.

When the Soviet Union invaded Afghanistan in December 1979, the tables were turned. President Jimmy Carter ordered the CIA to provide assistance to the Afghan resistance, who were fighting Soviet forces with little more than their trusty Enfield rifles. The CIA organized a coalition that included Britain, Saudi Arabia, Egypt and the People's Republic of China — yes, the Chinese were only too happy this time around to provide the ordnance to kill Soviet troops instead of Americans. Literally every AK-47 round, mortar round, rocket-propelled grenade, or anti-aircraft missile fired at the Soviet forces passed through CIA's pipeline. (Nevertheless, the Soviets — aside from a few sneering threats by KGB officers I ran across in Pakistan — never seriously considered striking back at the external supporters of the Afghan resistance.)

In 1989, the Soviets gave up and withdrew from Afghanistan. They lost over 15,000 troops killed. Two years later their empire was gone.

The rules of proxy warfare that were developed during these conflicts point to another lesson, perhaps the ultimate one regarding America's rising confrontation with Iran: If there has to be war, better let the other side start it.

The Bush administration might dismiss the need to negotiate with Iran's blustering president, Mahmoud Ahmadinejad, over Tehran's nuclear aspirations and the proxy wars it is accused of waging in Iraq, Syria, Lebanon and Palestine. But Washington should nevertheless remember that the modern nation of Iran traces its roots back to ancient Persia and that beneath every Iranian lies a Persian who views his country in the context of "Greater Iran." Even before Rome conquered the Western world, the lands controlled by a series of Persian empires stretched from the Caucasus to the Indus River, a cultural and sometimes political arc that not so long ago contained Iraq and Afghanistan and much, much more.

It is delusional to suggest that Iran would remain a spectator to a foreign invasion of a part of "Greater Iran." Iran's current meddling in the region is a re- asserted Persian version of America's Monroe Doctrine, which unilaterally put the world on notice that outside interference in the affairs of the American hemisphere would not be tolerated.

If the United States is to wage war with Iran it should be for sound reasons, not for some sleight of hand manipulation. Such a war, regardless of how it starts, will most certainly have a bad outcome, just as the current adventure in Iraq can have no good outcome.

The Bush administration, or the one that succeeds it, will ultimately have to start talking with Tehran. If that is inevitable, why not get on with it?

Milt Bearden was the CIA chief in Pakistan from 1986 until the Soviet withdrawal from Afghanistan in 1989.

RIP, Iwao Takamoto

I meant to post something earlier, but I would be remiss if I didn't comment on the passing on January 8, 2007 of 81-year-old Iwao Takamoto, the creator of Scooby Doo. Takamoto was also instrumental in the creation of "The Flintstones" and "The Jetsons"

For anyone under the age of, well, 40, I daresay we all owe a good portion of our childhood joy to this great American.

According to the AFP:

"Takamoto was born in Los Angeles in 1925. After the bombing of Pearl Harbor, his family was sent to an internment camp where he received basic illustration training from fellow internees.

"He first entered the cartoon world after World War II as an assistant animator for Walt Disney Studios. While there he worked on such children's classics as 'Cinderella,' 'Sleeping Beauty' and 'One Hundred and One Dalmatians.'"

Scooby Doo was an important part of my life. Still is. To this day, I count one of my great "talents" to be that I can identify any episode of Scooby Doo, starting from any point, within 3 seconds -- not counting the Scrappy Doo adventures and later abominations.

Scooby Doo was a wonderful part of my childhood, and I wouldn't give it back for anything. RIP, Mr. Takamoto. You were a true American original.