Slow Boring · Economics & Policy
TIER 4 Wed, 23 Apr 2025 10:02:21 +0000
The dire consequences of a decline in voluntary compliance ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ | | ---|---|--- | | | Forwarded this email? Subscribe here for more --- # Trump is crippling the tax police ### The dire consequences of a decline in voluntary compliance | | Matthew Yglesias --- | Apr 23 --- | --- --- | | | --- | | --- | | --- | | --- | | READ IN APP --- The late Donald Rumsfeld had a funny bit where he would send a letter to the IRS stating that he had no idea whether his tax return was accurate because the correct number is essentially unknowable, and scolding Congress for bequeathing to the public a tax code so complicated that nobody really knows what anybody owes. It's funny, and I think it resonated with a lot of people who have complicated tax situations. But that's not actually most people. Most people have a job, and that job pays them a salary. Taxes are withheld from their biweekly paycheck based on a rote formula, and at the end of the year, they get a modest refund because that's how the withholding defaults work. For most people, their income is their salary, they take the standard deduction, their investments (if any) are in a 401(k), and calculating what they owe is pretty simple. It's true that filling out the forms is annoying and the whole process can generate a fair amount of anxiety. But the underlying taxes are actually simple, and for most taxpayers, the government could easily send most taxpayers a pre-filled form with their income (employers have to report how much they pay as part of their own taxes) and what the IRS thinks they owe. Under the Biden administration, they moved in this direction with DirectFile, but of course the Trump administration killed that program. That's most people's taxes. Then there's me. I co-own a company with my wife. She and I are also employees of the company. We derive income from our salaries, but also the company's income "passes through" onto our individual taxes. We get a statement from Stripe indicating how much money they paid to us as Slow Boring subscriptions, less Substack's cut and their own. But that is not income in the way that a salary is income -- it's revenue. The income concept, in a business context, refers to profits. So the money we pay to Google for Google Workspace software and email accounts is deducted, and so is the rent we pay for our office. So is my subscription to Riverside for podcast recording software. So are our computers. Upgrade to paid It's this stuff, the handling of business expenses, that makes our taxes complicated. If you read "a simple guide to claiming software tax deductions in 2025," you'll see that it's not simple at all. | | ---|---|--- And it gets more complicated the deeper you read. For example, the "necessary" part of "ordinary and necessary" does _not_ require the software to be literally indispensable. I could do my job without Claude Pro, for example -- I was doing this work long before it existed -- but I do think it meets the standard the IRS has articulated as "helpful and appropriate." Is it ordinary? I think obviously yes, in terms of how this has been enforced in practice. But by definition, brand new products aren't literally ordinary. On the other hand, "helpful and appropriate" and "necessary" all mean different things in ordinary language! The tax code is very complicated in its details. We have statutes and regulatory interpretations and case law, but when a complicated system meets a common law legal tradition, it results in a lot of ambiguity. It also generates opportunities for everything from aggressive claiming of business expenses to outright fraud. But part of the genius of America is that while tax cheating happens, most business owners act like Rumsfeld and make a good faith effort to pay what they owe. This is what's known as voluntary tax compliance, and the fact that the United States maintains a high level differentiates it from places like Greece or Nigeria. Of course, voluntary compliance is not entirely separate from enforcement. With a high level of voluntary compliance, tax officials can check up on a higher share of shady-looking returns. And the sense that a shady-looking return might be scrutinized motivates voluntary compliance. If enforcement capacity plummets, though, people will notice and voluntary compliance will fall, forcing us to rely more on hard enforcement, even as hard enforcement capacity has evaporated. This is a totally normal crime dynamic that conservatives understand and appreciate in most non-tax contexts. But the Republican Party has developed a perverse affection for rich tax cheats and as a result, Donald Trump is axing America's tax enforcement capacity and risking a collapse of voluntary compliance. #### Business owners have a lot of ability to cheat One thing about business expenses is that the facial legitimacy of a given expense hinges critically on what kind of business we're talking about. It would be ridiculous of me to claim power tools as a business expense, and that's completely obvious if you are aware that Slow Boring is a political newsletter. But Slow Boring _could_ be the name of a home repair company. On Monday, I met someone who told me I have a very self-deprecating name for my website. I didn't want to get into the whole explanation, but there's nothing self-deprecating about it! The name is a reference to legendary German political theorist Max Weber, who compared politics to drilling holes through hard boards of wood. You could imagine a pretentious carpenter giving his business the same name, though. And I'm not going to insult anyone's intelligence by pretending to know what kind of tools a carpenter might buy for his legitimate business, but I feel pretty confident that there is some overlap between the tools a home renovation professional would buy and the tools that an enthusiastic hobbyist or generally handy person would own. And the world is full of "dual use" technologies like that. Kate and I bought furniture for our office, and that's a business expense. We also bought furniture for our house, which is not. But it's not obvious just eyeballing our records what's a lamp or a coatrack for the office versus what's for our home. We have kitchen equipment in our kitchen at home. We did not buy any kitchen equipment for the kitchen in our office, because it's already fully stocked. But not every office is like that -- a toaster oven or a coffee machine or a SodaStream absolutely _could_ be a legitimate office expense. If you know the details of our particular office setup, you'd know that it's not for us and that anything like that we purchased would have to be a personal expense. But you couldn't just scan the paperwork and see something obviously amiss; you'd need detailed information about our situation. Similarly, I'm flying to Nashville next week for a work trip and I promise the airfare is a 100 percent legitimate business expense. That said, the last time I flew to Nashville, it was to hang out with some friends. If I got audited, I could easily demonstrate that I had legitimate work there on this upcoming trip. But the point is there's nothing about "plane fare to Nashville" that constitutes an obvious red flag, and you could try to get away with some scammy stuff. I wrote two posts about Jamaica when we went on a family vacation there, and I suppose I could have tried to represent that as in part a work trip for tax purposes. There's a lot of potential for shenanigans. But a healthy society pairs high levels of voluntary compliance with reasonable odds that shenanigans will be detected and is therefore able to maintain a high level of tax revenue without absurdly high tax rates. Of course, voluntary compliance isn't perfect, and America's ability to audit rich business owners' tax returns has been declining for the past couple of decades. This is one reason that Democrats enacted a higher level of IRS enforcement funding. Some people wanted to judge the success of that based purely on the direct revenue raised by enforcement actions. But just as the job of a police department is much more to prevent and deter crimes than it is to solve them, the purpose of tax enforcement isn't so much to catch tax cheats as to get people to voluntarily pay what they owe. Upgrade to paid #### Trump is dismantling the tax police Enter the Trump administration, which between layoffs and resignations has the IRS on track to lose about a third of its personnel this year. Amidst that personnel bloodbath, Trump has had multiple acting directors of the agency resign because they keep getting asked to turn tax data over to immigration authorities in a way that IRS leadership believes is illegal. I think a reasonable person could argue that the US tradition of siloing information for privacy reasons goes too far and is counterproductive. On the other hand, reassuring people that their tax information will not be illicitly shared has a certain value. Either way, immigration enforcement is pretty clearly peripheral to the IRS's main job, and there's something disturbing about Trump's monomaniacal focus on this edge case while collapsing the agency's basic customer service and revenue functions. The new acting director is a guy Trump likes because he went after Hunter Biden. Trump himself, meanwhile, keeps running around claiming that he can replace all income tax revenue with tariffs. The short-term upshot of this is going to be less tax enforcement and more people getting away with cheating. But the point of this whole long disquisition on voluntary compliance is that cutting enforcement by a third doesn't just mean you catch fewer tax cheats. It means that next year, more people are cheating because they realize it's easier to get away with it. The more people cheating, the lower the odds of detection, so yet more people cheat. The next thing you know, anyone with remotely complicated taxes feels like a sucker if they follow the rules and revenue is collapsing. I've heard friends speculate that this is all part of some bonkers version of class warfare, whereby the GOP has decided that highly paid professionals earning W-2 salaries are the enemy, but high-income small business owners are the good guys. I doubt it's anything as complicated as that. These are careless people, and they're smashing up things and creatures and counting on others to clean up the mess. That's most obvious in what they've done on trade, most evil in what they've done to foreign aid, and perhaps most consequential in what they've done to scientific research. There is absolutely no reason to be enforcing immigration law by denying due process, assaulting free speech, punishing innocent people as if they were violent criminals, or kneecapping the American tourism industry. Republicans don't like taxes and they don't like federal employees, so they're wrecking the IRS without thinking through the consequences. These "starve the beast" tactics don't really make sense; every dollar spent in 2025 is going to need to be paid for one way or another, no matter how low tax collections drop. Forcing additional borrowing in a period of rising interest rates is only going to increase aggregate spending over the long-term, while raising financing costs for everyone who gets a mortgage or a car loan. I know this fiscal policy stuff -- like the deficit-increasing, Medicaid-slashing budget resolution wending its way through Congress -- isn't as exciting as Pete Hegseth's antics or the latest legal standoffs. But the interest rate situation is one of the huge differences between Trump's first and second terms. There was this infamous moment in George W. Bush's first term when Dick Cheney said, "Reagan proved deficits don't matter." And for most of the 21st century, they really haven't. But that stopped being true during Joe Biden's term, and it remains untrue today. If we cripple the government's ability to collect taxes, it's going to be a very real problem for the country. Share _Slow Boring works because of the support of readers like you. Discounts are available forgovernment employees, as well as students and teachers._ Upgrade to paid --- | | | Like --- | | Comment --- | | Restack --- (C) 2025 Matthew Yglesias 548 Market Street PMB 72296, San Francisco, CA 94104 Unsubscribe