Voluntary Tax: It’s Merely a Sugarcoated Pill

The US tax code states that it is based on “a system of voluntary compliance.” However, this is a complete misnomer. Taxation in the US, like most other countries, is instead based on the phrase used by highwaymen during robberies: Your money or your life. Taxpayers should not be under the misconception that they have a choice in paying taxes to the government. People cannot choose whether to pay taxes, nor how much they pay.

The only part that is voluntary is the way you submit taxes. Compliance isn’t voluntary, it is mandatory. Plus, the onus of calculating the taxes owed to the government is on you. Under-reporting your income or overstating deductions can lead to interest charges and fines. Failure to file tax returns can lead to fines and imprisonment, depending on the amount owed. Collecting money from people by threatening them with dire consequences is as loathsome as pointing a gun to someone’s head and asking for his wallet.

Misconceptions About Taxes

Yes, we’ve all been told that paying taxes is important for the economy because it finances the government’s public works. So, taxes are considered a “zero-sum game,” where the government takes a specific amount of money from its citizens to spend on various welfare and infrastructure initiatives. So, the total economic activity remains unchanged – hence, zero sum.

The truth is that it is not “zero-sum” by any standards. It’s extremely negative for the individual and the economy. Yes, taxes actually hurt the economy. It disincentivizes people to earn and produce because the more you make, the higher the total tax you pay. This is even worse because most countries have a progressive tax rate. So, the higher you earn, the percentage you pay as taxes also rises. Why work harder and earn more when you end up giving away a larger portion of your earnings?

What is the government spending all the tax revenues on? A large part of government spending is neither on infrastructure nor welfare. It is spent on running the government, paying salaries, perks and overheads for the government’s fancy offices.

Taxes not only erode national output but is also detrimental to consumption. Taxes lower people’s take-home pay, reducing their purchasing power. So, taxes reduce private sector demand by taking money out of the economy. Direct taxes, like corporate tax, hurt business investment, while indirect taxes, like value-added tax (VAT), decrease consumption.

So, taxes can actually reduce GDP by disincentivising investment and reducing purchasing power.

The Government Knows All This

Surprised? Yes, the government understands how taxes are a big drag on the economy. It actually admits this when it uses temporary tax cuts to stimulate economic growth! The temporary relief from taxes is used to drive higher production and private demand. Sadly, the government seems to have become dependent on tax revenue. Every time tax revenues expand, the government increases its expenditure to use up all the funds and then look for some more.

Rather than SOPs in the form of changing tax slabs or temporary relief, the government should become leaner and leave infrastructure development to the private sector. The nation’s tax burden will ease. Historically, the most prosperous and productive periods for economies have been during times of major tax rollbacks. Maybe it is time to teach the government, just like we teach our children, to stand on its own feet and make taxation truly “voluntary”.