In yesterday’s New York Times magazine, Freakonomics authors Steven Levitt and Stephen Dubner contributed an article entitled “Filling in the Tax Gap.” In it, they argue that it would be a good thing if the IRS audited substantially more income tax returns than it does (last year, only .19 percent of taxpayers, according to the article) because doing so would bring in lots more moolah for the feds. They cite a study purporting to find that Americans underpay their taxes by $345 billion per year. “This sum happens to be just a few billion dollars less than the projected federal budget deficit for 2007,” the authors inform us.
Let’s assume it’s all true. Does it follow that more audits would be a good policy?
Assume that the feds had collected that $345 billion extra. How would the country be different? The people and companies that actually earned money would have had $345 billion less to spend and invest, and the federal government would have had $345 billion more. Who makes more productive use of resources — the private sector or the state? Levitt and Dubner appear to blithely assume that it’s better for the government to have more, but that’s a mightly shaky assumption for two supposedly good economists.
