Beware the ides of April

Policy Review, Spring 1994 by Adams, Charles

On the criminal side of tax enforcement, a tax fraud should be a genuine, honest-to-goodness fraud, with the same ingredients as a common law fraud. In California in 1987, a physician was convicted of felony tax evasion for intentionally not paying the tax he accurately declared on his tax return. While the ruling was reversed on appeal, the concept is an outrage. If we applied this to ordinary civil debts, it would mean that if you deliberately didn't pay your American Express bill, you would have committed a felony. That's federal overkill.

Perhaps we need to balance our government's tilt toward tax collectors by adopting a medieval view of taxation, in which excessive tax collections were considered sins against God. IRS agents take note: William the Good of the Netherlands was called "the Good" because he executed errant tax men.

Be sensitive to taxpayer unrest: Decriminalize the tax law. The penalties Congress piles up every year to trap taxpayers, innocent or guilty, along with fuzzy criminal provisions, amount to barbarism. It reminds one of the queen in Alice in Wonderland, who proclaimed, "Off with his head!" for every offense.

Our tax law is so complex, so incomprehensible, that in most complicated financial arrangements the line between avoidance (which is legal) and evasion (which is illegal) is too difficult even for the experts to determine. Harry Margolis, a California tax lawyer, was indicted over a period of 10 years for 34 different criminal tax felonies. After lengthy and costly trials, not one charge was ever sustained against him.

Because of the breadth and complexity of our tax laws, it is a mistake to criminalize tax evasion; the lines separating the legal use of tax codes to shelter income (avoidance) and their illegal use (evasion) are simply too blurry. Political leaders have long recognized the difficulties involved: The 4th-century emperor Constantine, for example, decriminalized the Roman tax law. Rome even granted a series of tax amnesties--in A.D. 401, 411, 434, 445, 450, and 458--so that "the very memory of delinquent taxes may perish from the earth." In many nations only tax fraud (deliberately falsifying documents) is a crime; tax evasion (not reporting income) is not.

Our current practice puts America on a par with the former Soviet Union and its arbitrary use of synthetic, or arbitrary economic crimes as a weapon against dissidents. Thomas Paine told us in Dissertation on the First Principles of Government, "An avidity to punish is always dangerous to liberty." The French essayist Michel de Montaigne wrote in the 16th century that no man is so honest or upright that if he were carefully observed in his actions and thoughts, under the law, "ten times in his life he might not be lawfully hanged." That certainly would apply to almost everyone under our criminal tax laws.

Yes, if the vague tax crimes in the tax code were vigorously enforced, most taxpayers would be indictable after a cursory audit. Thus, tax fraud should be a crime; tax evasion should not. It would be wise to purge the tax law of its many synthetic crimes and let the civil penalties take care of real tax sins.