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The Tax Cheating Crisis in Greece - and the U.S.

May 2, 2010

Even as the European Union and the IMF unveiled a $160 billion bailout package to avert a fiscal disaster in Greece, the New York Times documented one culprit behind that nation's fiscal woes: tax cheating. But while the $30 billion Athens loses annually to tax fraud and evasion proportionately far exceeds the $345 billion illegally denied to the U.S. Treasury each year, America is showing worrying signs of catching up.
As the Times reported in "Greek Wealth is Everyhere But Tax Forms," the "wholesale lying about assets" in that nation of 11 million people is symptomatic of the "staggering breadth of tax dodging that has long been a way of life here." With a GDP of $341 billion and a budget of $108 billion, the impact on Greece's fiscal health is grave:

Various studies, including one by the Federation of Greek Industries last year, have estimated that the government may be losing as much as $30 billion a year to tax evasion - a figure that would have gone a long way to solving its debt problems.

To put that number in perspective, U.S. GDP reached $14.25 trillion GDP in 2009, while President Obama's proposed federal budget for next year is $3.8 trillion. So the tax cheating epidemic in Greece is roughly three to four times worse than in the United States:

Various studies have concluded that Greece's shadow economy represented 20 to 30 percent of its gross domestic product. Friedrich Schneider, the chairman of the economics department at Johannes Kepler University of Linz, studies Europe's shadow economies; he said that Greece's was at 25 percent last year and estimated that it would rise to 25.2 percent in 2010. For comparison, the United States' was put at 7.8 percent.

Sadly, Americans seem to be closing the gap.
As the Los Angeles Times reported in 1998, "Internal Revenue Service Commissioner Charles O. Rossotti disclosed Friday that Americans are failing to pay $195 billion annually in taxes owed to the federal government, the highest estimate ever of the so-called tax gap." But just a decade later, that figure jumped to $345 billion, a staggering increase of 77%. (It should be noted that GDP rose 61% and the federal budget by 76% during that time.)
Helping to fuel that disturbing jump in tax lawlessness was the late 1990's Republican crusade against the Internal Revenue Service. Long before today's Tea Partiers misunderstood the concept of "no taxation without representation," the GOP's successful gutting of the agency and its incendiary anti-IRS rhetoric helped create a toxic atmosphere when it comes to paying taxes.
As David Cay Johnston describes in his book Perfectly Legal, the GOP during the Clinton administration waged an all-out war on the IRS, turning the priorities for auditing Americans upside-down. As Delaware Republican Senator William Roth's Finance Committee held hearings in 1997 and 1998, Mississippi's Trent Lott decried the IRS' "Gestapo-like tactics." Frank Murkowski (R-AK) similarly denounced those supposed "Gestapo-like tactics" while excoriating the Agency, "You don't need to send in armed personnel in flak jackets." Don Nickles of Oklahoma raged, "The IRS is out of control!" Meanwhile, GOP pollster and wordmeister Frank Luntz quizzed focus groups with his favorite question, "Which would you prefer: having your wallet or purse stolen or being audited by the IRS?" For his part, then Senator Phil Gramm in May 1998 denounced the agency and its director, Charles Rossotti. Peddling myths of jack-booted IRS agents tormenting American taxpayers, Gramm called on Rossotti to fire his 50 worst employees, before concluding:

"I have no confidence in the Internal Revenue Service of this country. You do not have a good system. This agency has too much unchecked power."

No surprise, Congress went on to pass and President Bill Clinton to sign the IRS Reform and Restructuring Act in 1998. And as Johnston documented, "In 1999, for the first time, the poor were more likely than the rich to have their tax returns audited." (Mercifully, that practice has been reversed under the Obama administration.)
As for Gramm and his ilk at UBS and other Swiss bank, the IRS is finally cracking down on the secret offshore tax havens that are costing the federal government billions each year. That effort couldn't come soon enough. In the wake of the Bush tax cut windfall for the wealthy, income inequality in the United States reached record levels. (One indicator of that massive upward redistribution of wealth: between 2001 and 2007, the incomes of the 400 richest U.S. taxpayers doubled even as their tax rates were halved.)
Discussing the tax cheating crisis faced by Athens, the New York Times noted, "Such evasion has played a significant role in Greece's debt crisis, and as the country struggles to get its financial house in order, it is going after tax cheats as never before."
So, too, should the United States.


Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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