Occasional musings, Geistesblitze, photos, drawings etc. by a "resident alien", who has landed on American soil from a far-away planet called "Germany".

Monday, December 26, 2011

On Free-Riders and Tax Cheats

A recent article in the NYTimes introduces the free-rider problem as follows:

“You can watch PBS without making a donation; you can enjoy clean air even if you drive a car that pollutes. Such goods, however, give rise to the so-called free-rider problem: acting selfishly makes sense for each individual (why sacrifice if you don’t have to?) but as more and more people choose to act selfishly, the good disappears and everyone loses.”

The article struck a chord with me because I had just met an accountant who stated proudly that he knew how rich people could manage their money in ways that allowed their heirs never to pay any taxes. I was taken aback and remarked, “But will they use the roads built with other people’s taxes?”, to which he answered, gleefully, “Well, the roads will not be built with their taxes!” And when I pointed out that we were currently watching a whole country, Greece, going down the tubes because, among other things, cheating on taxes is endemic there, he replied that everything he would suggest would be legal.

In other words, I had encountered a form of the free-rider problem before I even knew that it had a name. Now, I find it perfectly legitimate to try not to pay more taxes than necessary, and that’s why we employ our own tax planner. But I do consider attempts to avoid paying any taxes while fully using the goods and services created by the taxes paid by others (roads, police protection, food safety supervision, to name a few) a form of sociopathology.

I knew that “cheating the government” was an attitude prevalent in the underground economy of tradespeople, which I deal with frequently. My conversation with the accountant showed me, however, that the attitude goes all the way up to people with the highest income. This is very different in the country I come from, where people are willing to pay taxes as long as they see them used in beneficial ways. In fact, conversations with friends and what I read in online magazines suggest to me that plans of the current German government for tax relief are meeting a less than enthusiastic response. People know that as a result, the public debt would have to increase or some social services be cut, and that’s considered worse by many than having 200 Euros or so more in their pockets.


mac said...

Completely agree with you, Ulrich. The greed is going to change this country to a degree that is going to shock them.

Ulrich said...

@mac: I don't know about the Netherlands, but in Germany even the language used is different from the US. Germans do not pay taxes to "the government", but to the Staat (the "state" in the sense of the larger political body the citizens belong to) or to the Fiskus, i.e. the fiscal authority. This illustrates, to me, already a completely different attitude about taxes.

Heika said...

@Ulrich, I have lived in Germany and I can attest that what you say is absolutely true and more power to the Germans for recognizing the relationship between paying taxes and a livable society.

But I think there is a real reason for the difference in attitude that you don't address and that seems very important. Germans, or at least when I lived there twenty or so years ago, regularly see tangible evidence of their taxes being used to benefit the world they live in. Increasingly Americans do not.

Instead, we see our tax dollars used to bail out scoundrel banks, for just one instance, who manifestly cheated the people who came to them for mortgages. For another, in some ways even more egregious instance, we see our tax dollars going for wars that do infinitely more harm than good and, as a result, we don't want to give money to the government.

As I see our government doing everything possible to make the rich get richer while simultaneously cutting social programs for the most destitute, I don't want to pay taxes either. Why in the world would I want to give money to people who have, especially since the 2008 melt down, systematically betrayed the people they are supposed to represent? I'd be an idiot to assume they have my interests at heart and only fear of legal penalties keeps me coughing up cash for a government that is completely out of touch with the cares and concerns of 99% of the population.

Ulrich said...

@Heika: Wow, what can I say? I understand how you feel (although, as a technicality, I think the money used to bail out the bank has been gotten back or will be when the shares the government bought are sold; but seeing, for example, tax money being spent on defense boondoggles rather than on repairing the crumbling infrastructure can make one mad, truly)...

Ulrich said...

But I also have the strong impression that a distrust of the government is so deeply ingrained in the psyche of many Americans that it wouldn't even change if tax money were spent more beneficially. I was really stunned when the accountant I mentioned told me stories about the ruses some of his colleagues use to, in this case really cheat "the government" out of even a few dollars, like

when having a tax-deductible business dinner, order a second dinner to go, which will be on the same bill, so that you can have a tax-free meal the next day

or even more bizarrely, don't have your clothes cleaned before a business trip and give the whole pile, including the clothes used during the trip, to the cleaners afterwards b/c cleaning bills for clothes used on a business trip are tax-deductible.

I mean, how petty can you get, especially with an annual income in the 6 figures?

Heika said...

I agree about these kinds of petty and ultimately pointless examples. I mean how much can they possibly save. It's as if cheating the government were some stupid game with no consequence.

But I am skeptical that people who actually benefitted from government programs would be loathe to fund them through taxes. Perhaps you are right but as of yet, we can't know because so much of our tax money is spent subsidizing the government's passion for warfare and corporate welfare. It's certainly not spent on improving our social safety net. In fact, the government, aided by Obama's pipe dream desire to woo conservatives, seems intent on rending what little net there is.

As an aside, I know some of the money used to bail out the banks has been recouped. I strongly doubt all of it, although I have to research that, as well as when these "loans" will supposedly be repaid, presumably with interest.