If such a thing as American exceptionalism remains, maybe it can be found in this: Despite deep IRS budget cuts, an average audit rate that has plunged in recent years to just 0.6 percent, and a president who has bragged that dodging federal taxes is “smart,” most Americans still pay their income taxes every year. Even more remarkable, most of us feel obliged to pay. To quote the findings of a 2017 IRS survey: “The majority of Americans (88%) say it is not at all acceptable to cheat on taxes; this ethical attitude is not changing over time.”
True, tax crooks might not confess their real feelings in an IRS survey. But other data confirm that the U.S. is among the world’s leaders when it comes to what economists call the voluntary compliance rate (VCR). In recent decades, America’s VCR has consistently hovered between 81 and 84 percent. Most countries don’t calculate their VCR regularly, but when they do, they lag behind the U.S. One paper that gathered what comparative data were available reported that Germany, the top European Union economy, had a VCR of 68 percent.
Other countries score worse, among them Italy (62 percent), the site of a sprawling tax scandal in which about 1,000 citizens were charged last year with bilking the government out of 2.3 billion euros in tax revenue. The public didn’t seem terribly bothered; ex–Prime Minister Silvio Berlusconi, who was convicted of tax fraud in 2013, may have tapped a common sentiment when he said back then that “evasion of high taxes is a God-given right.”
Then there’s Greece, where economists have struggled to even calculate a VCR. According to the International Monetary Fund, more than half of Greek households pay zero income tax. Indeed, tax evasion is practically a national sport. Take the swimming-pool trick. After the 2008 recession, the government placed a luxury tax on private pools. When only 324 residents in the ritzy suburbs of Athens admitted to having one, tax collectors knew they were being swindled—but didn’t know how badly until Google Earth photos revealed the real pool count: 16,974. It’s now common to conceal chlorinated assets with floating tiles, army nets, and pool interiors painted to mimic grass.
What separates Americans from Greeks or Italians? It’s not income-tax withholding, which the U.S. pioneered but Europe has since copied. Higher tax rates may be one factor. Illegal shadow economies, in which goods are sold off the books for cash, are another. (Greece’s black market is the biggest in the eurozone, accounting for 21.5 percent of its GDP.)
Economists say a third factor, one with profound political implications, is tax morale. This is a catchall term for various forces that motivate people to pay taxes, including social norms, democratic values, civic pride, transparent government spending, and trust in leadership and fellow citizens. People are more inclined to fudge (yes, economists use that word) their tax forms if they think others aren’t paying their fair share.
None of this would seem to bode especially well for tax morale in the U.S., where faith in government has been dropping for decades. So why are Americans still paying? One possibility is that declining trust has been offset by reforms that made cheating harder. Since 1987, to take one example, tax filers have been required to list Social Security numbers for dependents, a change that generated almost $3 billion in revenue, as the number of dependents nationwide shrank by millions. (Suspiciously, some of the disappeared had names like Fluffy.)
A more worrisome possibility is that tax morale has lagged behind declining trust, and will yet fall. High-profile tax-avoidance schemes—like those detailed in the so-called Panama Papers, or by The New York Times’s reporting on the Trump family’s tax dodges—could help erode morale. “Our sense of right and wrong is dramatically influenced by other people,” says Dan Ariely, a professor of psychology and behavioral economics at Duke. “If people think that the government is corrupt and not doing the right thing,” he told me, they may be more inclined to say, “Oh, I don’t want to pay money to a government that is misbehaving.”
This article appears in the April 2019 print edition with the headline “Why Americans Don’t Cheat on Their Taxes.”