You’ve probably heard about the worldwide brouhaha involving very wealthy folks, including Americans, secretly stashing huge sums in a Lichenstein bank to avoid paying income taxes. Lichenstein, which was previously best known for its postage stamps featured in stamp collecting ads on the back of magazines, has bank secrecy laws purportedly stronger than Switzerland.  And, the Lichenstein bank involved is owned (or controlled) by its monarch, so there was an additional sense of security.

The only reason the information came to light is because a disgruntled IT person at the bank violated Lichenstein law by copying all relevant account details to a CD and making them available (for a price, I understand) to tax authorities in the countries of the depositors. (Lichenstein has appropriately issued a warrant for his arrest.)

So what is the lesson here? That you can’t evade taxes? I think not. I believe there are many folks successfully evading taxes who will never be identified.

I think the lesson is that when government imposes taxes at a confiscatory level, as with a progressive income tax which takes more and more of each incremental dollar (on the communist principle of  “from each according to their ability”), it creates a financial incentive to evade them.  Tax evasion is principally a cost-benefit analysis decision. What is the risk / cost of detection versus the financial reward? If I think the risk is low and the reward high, then tax evasion is the logical choice.

Many folks take the same approach to speeding….until they’re caught. But we still have rampant speeding, even though it kills more folks than tax evasion and so is far more dangerous. It was just bad luck for the Lichenstein depositors. Kinda like getting caught speeding. (Except I’ve never understood the financial reward for speeding, since higher speed wastes gas, so I’m the guy going 62 on the Interstate.)

In business, one way to make a profit is to charge a low price which includes a small profit but sell a very large quantity. That’s the Wal-Mart mass merchandising approach. The snooty boutiques sell a small quantity at a very high price with a large profit but they target a very limited clientele.   

I think the federal government could significantly increase income tax revenues by taking a Wal-Mart approach and simplifying the tax system. Everyone pays a flat percentage on all income with no deductions, except a flat amount per person. With tax simplification, we will not see the economic distortions of financial decisions based on tax implications rather than business reasons.

No more targeted tax breaks inserted into law by a Congress member who probably received a large donation from the firm seeking the tax break and which few other members even knew was inserted into a bill. There are targeted tax breaks so specific that only one entity qualifies but the language reads something like:

…a deduction for investing in an armadillo farm located in an enterprise zone in a state with an unemployment rate of at least 4.65 percent, providing sales tax exemption for ostrich feed and which was struck by a Category 4 or higher hurricane in a year divisible by three following a Super Bowl loss of at least eight points by a West Coast team owned by a Belgian beer distributor which also has an agreement, executed in the Chinese Year of the Rat, to sell Russian vodka brands beginning with the letter “S” to an Asian country with a King and which was never occupied by Japan during World War II.

Tax simplification will also bring probably millions of savings from decreasing the size of the IRS. There will be much less financial incentive for tax evasion. And, more money in the private sector will improve the economy.