August 12, 2009 - Phil Hodgen

UBS and IRS have a deal, beans to be spilled later

According to Reuters, UBS has settled with the IRS.  Names will be named.  (How many?  Yours?  We shall see.)  Beans will be spilled.  Fingers will be pointed.  Bureaucratic chests will be puffed outward.

Meanwhile, back on earth. . . .

(I have been accused of being obtuse in the past.  By my wife.  Let me explain.)

The U.S. government thinks by its current strategies chasing international tax evaders that it is solving tax compliance problems, will now balance the budget with taxes collected on evil Swiss accounts, and unicorns and rainbows will follow.  Taxpayers will faithfully report income and pay tax.  Etc. Exquisitely wrong.

An invitation to a wager

Would anyone care to make a long bet with me?

I predict in 10 years that U.S. voluntary tax compliance rates will be lower than they are today.  There will be more tax evasion.  There will be more unreported income. We can agree on the statistic to be used to settle the bet in a decade.

My reasoning

I believe tax evasion will increase because the U.S. tax system is increasingly complex and the pricing for compliance/noncompliance is out of whack.  Even a smart, alert person will inevitably have a foot-fault in tax law, and the cost of failure is magnificently and obscenely disproportionate to the error.  Therefore over time we will see people failing to see the benefit of voluntary disclosure.

The UBS settlement will cause pain to a few thousand people.  It will imperceptibly (over the next 5 years) damage the Swiss financial industry.  It will not alter human behavior.

The only thing that will alter human behavior in tax systems is to balance the cost of compliance against the cost of noncompliance.  What is the price perceived by a taxpayer for filling in the forms correctly and sending the correct amount of money to the government?  What is the price perceived by a taxpayer for attempting — but failing — to do things correctly?  What is the price perceived by a taxpayer for telling the tax system to go stick it’s nose in a dead bear’s bum?

And no, Congress, you can’t achieve the tax revenue result you want by ratcheting penalties up until you have the tax equivalent of capital punishment for a parking ticket.  Which is exactly where we are right now for many people with undisclosed offshore accounts.

US Real Estate Investments Voluntary Disclosure