The Limits of Enforcement

Most people I've talked to both on and offline are in agreement that requiring 1099s for equipment purchases is a pretty egregious waste of enforcement energy.  But there are a few who argue that it's really, really important to crack down on tax evasion.

I will not defend tax evasion.  But it's not true that we should, always and everywhere, crack down on this sort of thing. 

Every time there's a policy debate, Waste, Fraud, and Abuse once again rears its ugly head, and we hear that we could save vast sums by eliminating them.  Leave aside the fact that these estimates are, necessarily, very approximate; if we could count all the waste, fraud and abuse, we wouldn't have much of it.  Even if the numbers are correct, they're only useful in some frictionless universe where we can easily eliminate 100% of the dreaded WFA.

Unfortunately, in our non-frictionless universe, eliminating these things is often very costly--and the smaller the transactions, the more costly it is.  My favorite example of this is an office I once temped for--for one long, long week.  Some office manager had decided that to cut down on the expense of supplies, each person would only get one of key things, like pens. In order to get a new one, you had to turn in your old pen.

Needless to say, this did cut down somewhat on the pen outlay.  However, it diverted considerable employee energy into pen-loss mitigation strategies.  As soon as one person misplaced their pen, pen theft blossomed.  As did the gray market in pen security equipment.  By the time I arrived, employees were spending a considerable portion of their day looking for ways to indelibly mark their pens as their own, and the rest of the time trying to steal someone else's poorly marked pen.

I don't know what they were spending on pens, of course, but I don't see how this could have been a cost-effective outcome.  I assume that the practice was eventually ended, but their receptionist eventually came back from vacation (to a penless desk, of course) and I never learned the end of this sad story.

That's why drugstores budget for shrinkage rather than locking everything away, putting it behind the counter, or searching the patrons as they leave.  It's why businesses do not actually attempt to make sure that every expense is 100% justified.

In fact, systems often need this kind of loss to reduce friction in the system; I've heard a plausible case made, for example, that without Medicaid fraud, virtually no one on Medicaid would be able to secure primary care outside of a hospital clinic.  The reimbursement rates are simply too low.

In the case of the 1099s, at $1.7 billion a year I don't see how the increased taxes can possibly justify the enormous new compliance burden, especially when you consider that some of that burden will be a direct cost to the government in the form of IRS agents dispatched to untangle the inevitable false flags in the audit system.  There are some bits of tax revenue it just isn't worth going after--even though, yes, it means that some small business owner, somewhere, is probably getting away with something.