Dodging Taxes and Fudging Forms Is de Rigueur Around the World
MOSCOW, MEXICO CITY, TOKYO, PARIS, BOSTON, AND WASHINGTON — FOR residents of the United States, paying taxes is an annual rite of annoyance. Finding those pesky W-2 income forms, toting up deductions for old clothes given away last summer -- it's enough to make cleaning the garage look like a rousing good time.
Not to mention the shock of seeing how much of your income flows to the federal government. On examining their 1040 bottom line, even the most liberal of Democrats can turn into a firebrand fiscal conservative.
But as laggards race for the post office to beat this year's April 17 deadline, US taxpayers might do well to consider this fact: By some international measures, they have it easy.
The personal tax burden in Europe, for instance, is roughly 50 percent higher than it is in the US. In Russia, tax police can raid your office. In Mexico, almost no tax deductions are allowed.
All around the world tax systems provide a window into the history and characteristics of different countries. Lest US taxpayers feel smug, it should be noted that tax disparities sometimes simply reflect what citizens want. Europe's high rates support cherished health, education, and retirement benefits.
''They [Europeans] look at us and say we're being very stingy; we look at them and say they're being very profligate,'' notes Henry Aaron, an economist at the Brookings Institution, a Washington-based think tank.
Still, in light of all the tax cut rhetoric rising from Washington these days, US taxpayers might be surprised to learn that most economists judge the US lightly taxed when compared with other industrial societies. Mr. Aaron says that in most developed nations personal taxes approximate or exceed one-half of total income for the average taxpayer. In the US, the figure is more like one-third.
But before mobs of angry citizens start caning economists in the street, it should be noted that high taxes can do damage to an economy.
One issue is balance. Government taxes coming in should reasonably match government expenditures for long-term federal fiscal health.
Simply comparing tax rates across national boundaries isn't an instructive enterprise, notes James Hines, a public-policy expert at Harvard's John F. Kennedy School of Government, in Cambridge, Mass.
But comparing deficits is -- and on the whole, no nation runs a deficit quite as big as the US does in absolute dollar terms. The US deficit, however, as a percentage of gross national product is relatively small compared with the deficits of some of its industrial peers.
High taxes discourage economic growth, but so do deficits. ''All a deficit is is an unspecified future tax,'' Mr. Hines says. ''There is reason to fear [deficits] because if you start a business, will you be heavily taxed in the future?''
Closing the US deficit would require extensive cuts in the federal budget. Popular entitlements such as social security would likely not escape. A detailed discussion of this problem will be left to articles that begin with the phrase ''House Republicans today ....''
Economists also note that there are distinct advantages to the US taxation system. Perhaps primary among them is the fact that US citizens see it as legitimate. The average taxpayer may overstate the deductible value of old cutlery given to a church rummage sale, but on the whole compliance is quite high.
Russia: the Wild East
For a look at a nation where the tax system isn't seen as wholly legitimate, consider Russia. To accountants, as well as mobsters, Moscow may represent today's Wild East.
Like most Russians, ''Nikolai'' (not his real name) doesn't pay income tax. The last time he did was three years ago when he had a government job and taxes were automatically deducted from his paycheck. These days, however, like a growing number of Russians, he is working for a private firm -- and not paying any taxes at all.
Faced with growing debts, which in the Communist era were covered by the state, the government is now seeking new ways to find out citizens' true incomes -- and make them file. But the tax system, still in its infancy, is so muddled and mired in red tape that few actually do.
''Apart from the tax rate being ridiculously high, there is a general view that people here have been robbed by the government so much in the past that now they don't owe anything to this government,'' says ''Misha,'' who earns a hard-currency salary working for a Western firm but has never paid income tax in his life.
''I have also heard people saying that they don't want their money going to the Chechen war, for example,'' he says, a view echoed by many here.
But as income taxes would bring in needed revenue to a cash-strapped government (tax rates range from 12 to 30 percent depending on income), Russia is cracking down on tax dodgers.
Catching people is not easy, especially since only citizens who receive income from more than one main Russian employer and make more than 10 million rubles annually (about $5,000) are required to file personal-income-tax declarations by the April 1 deadline.
Billions of rubles are now being collected by tax inspectors, or the ''tax police,'' who carry out raids on offices and businesses, combing through files and records to see who has paid and who has not. Penalties, while rarely enforced, can be harsh, ranging from small fines to jail terms, depending on the amount of money concealed.
Dima, an independent tax consultant, adds that most businesses do pay taxes -- but take advantage of every possible loophole and ''gap'' in the law. Money-laundering and hard-to-trace ''offshorni'' accounts, for example, are common. ''Most of my clients are paying a lot but not fully. They are cheating a bit,'' he says.
Foreign firms also have it hard in Russia, especially as the laws seem to change almost daily. A new law that could sharply curtail foreign investment mandates all foreign offices operating in Russia that pay a 38 percent ''excess wage tax'' within the next six months.
Already imposed on Russian firms, the tax now applies to foreign businesses whose employees earn more than six times the national minimum wage of $30 a month.
''I think it's quite discouraging to foreign investors, but I don't want to predict what will happen,'' says Jessica Perera, manager of the personal income tax department at Ernst & Young's Moscow office. Employers already have to pay social security tax for each employee of about 41 percent.
A sad day in Mexico
Nor is Russia the only nation where the government's perceived cupidity drives taxpayer reluctance. In Mexico, April 30 -- an approximate equivalent of April 15 in the US -- is a sad day for many.
It's not just that Mexicans believe their taxes are too high. They also believe resolutely that their hard-earned tax pesos are falling into a black hole of inefficiency, bureaucracy, and corruption.
''Paying taxes is a civic duty, and I think our basic system is a good one,'' says Hediberto Aguilar, a Mexico City agronomist. ''But it's the way it is managed that is the problem. The money doesn't go where it is supposed to, but rather to corruption, fraud, questionable investments, and to maintain a bureaucracy.''
It's a common lament. Gerardo Segura is a researcher in ecology and natural resources at the National Autonomous University of Mexico in Mexico City, but he also consults for private companies, and thus must make the April 30 declaration.
''It's always a painful day,'' he says, ''because you never feel you're getting your money's worth.'' Mr. Segura is in the 30 percent tax bracket, which is generally where most of his friends in the US were when he and his family lived there for several years.
''But it was different there; the services were good, people could trust the police, roads worked, and there were acceptable schools,'' he says. ''Here you know your money is lost.''
Before former President Carlos Salinas de Gortari took office in 1988, Mexico's tax system was so complex, rates were so high, and the bureaucracy was so slow and inefficient that evasion was an unquestioned pastime.
But public finances were also a mess, with government accounts perpetually unbalanced. To combat that, President Salinas opted for a taxation reform that lowered maximum tax rates while dramatically increasing the number of Mexicans actually paying taxes and attacking tax evasion.
Maximum rates were lowered from 50 to 35 percent for individuals and from 39.2 to 35 percent for corporations. At the same time the system was modernized with computers, a move that tax experts say significantly reduced evasion, at least by wage earners.
The reform earns praise from economists, even though some say it didn't go far enough. ''We still need a simpler system that doesn't serve the needs of a finance bureaucracy,'' says Arturo Damm Arnal, an economist at Mexico City's Pan American University, who proudly calls himself Mexico's ''first fiscal revolutionary.''
Mr. Damm says any tax form is too complex if it can't be filled out in 15 minutes by a nonspecialist. But he says the proliferation of tax accountants and tax-filing specialists is proof that Mexico's income declarations are too intricate.
And that's in a country where few deductions are allowed. Medical costs are generally deductible, as are some costs for new computing equipment -- ''a benevolent government concerned with helping us figure our taxes,'' quips Mr. Aguilar -- but little else is.
''You can't deduct your housing costs, you can't deduct donations or any of the costs of using your car or eating while on business. There's next to nothing,'' Segura says.
Japan: Tax day? I forgot.
On the other hand, there are some nations where the tax system appears to run so smoothly that citizens hardly know what's happening. Tax day in Japan falls on March 15, and most people never even notice.
No anguished flinging of calculators the weekend before and no long lines at the post office. The Japanese government has all but perfected the painless extraction of money from its citizens.
[IRS policymakers take note: An American academic is considered the father of this system.]
For the vast majority of Japanese income earners -- salaried company workers -- taxes are withheld from income by their employers.
But unlike the American process, which requires the agonizing 1040 every April to reconcile the company's estimates with reality, the Japanese system is exact. The companies take out the correct amount, distribute it to the various local and national bureaucracies. The worker never has to file a thing.
''For example,'' says one Japanese salarywoman, a worker at a large financial institution who declined to give her name, ''when I get my salary on the 20th of this month, the tax is already deducted.'' No return, no long math, no hassles.
Salaried workers who earn more than 15 million yen ($176,470) a year do have to submit a return by March 15, as well as those with outside income or a change in their tax status, but they number less than 10 percent of Japan's 50 million salarymen and women.
The country's 4.75 million self-employed workers and farmers also must file returns, but it hardly seems an onerous process. Kyoko Higashikawa, a Tokyoite who recently set up shop as a freelance writer, says it took her about half an hour to do her taxes in early March.
Japanese tax authorities first started getting companies to do their work for them in 1940, when the government dramatically broadened income-tax eligibility in order to raise money for the war. But the system crystallized under the guidance of Carl Shoup, a Columbia University (N.Y.) business school professor who was brought to Japan in 1949 and 1950 by American occupation authorities to help rework the tax system.
Shoup-san, as he is known here, encouraged lots of direct taxation and is generally hailed by Japanese accountants as the creator of their tax system.
Of course, there are some drawbacks to all this painless efficiency. One is that it is extremely difficult to cheat, if you are inclined not to give the government all of what it wants.
Japanese say their system works under the ''9-6-4'' formula. This is shorthand for the widely held belief that company workers generally have to pay 90 percent of their taxes, freelancers and the self-employed can get by with paying 60 percent of what they owe, and farmers manage to hand over just 40 percent of what they should. Other wags have coined a ''10-5-3-1'' version, in which the added fourth category stands for the paltry 10 percent of their taxes that politicians are said to pay.
Do Japanese really cheat? ''Oh yeah, of course,'' says Ms. Higashikawa. ''If you have a salary you can't do anything,'' she says, but the self-employed ''can turn as many personal expenses as possible into business deductions.''
''It's a delicate issue,'' agrees Hiroyuki Tokushige, senior managing director of the Tokyo Certified Public Tax Accountant Association, ''how to divide business expenses and personal expenses.''
Another drawback, in the view of some Japanese analysts, is that the efficiency of the withholding system makes most people unconscious of how much they contribute to their government.
Japanese tax rates can get quite high -- up to 78 percent in extreme cases -- but there seems to be little public complaint about taxation.
Since 1989, the government has levied a consumption tax of 3 percent, which pretty much walks and talks like a sales tax, and this added burden has raised public hackles. The government has since introduced measures to raise this tax further, but one prime minister, Morihiro Hosokawa, was forced to resign last year in part because he tried to hike it too quickly.
The audit-less France
In France, tax day also goes smoothly perhaps because income taxes are not very high. Such taxes account for only 17.3 percent of tax revenues, the lowest in Europe.
Most tax revenues come from purchases of milk, key chains, tractors, movie tickets, in short, almost all services and retail sales in the French economy. (In the US, income taxes account for 41.5 percent of taxes.) France was the first industrial nation to set a value added tax, now at 18.6 percent.
Before March 1, taxpayers are required to declare revenues. A tax inspector calculates the liability. Individuals are seldom audited. But concern for social values runs throughout the tax code.
In this year's tax forms, tax payers are asked to indicate the number of their children. This year for the first time, children under 25 years of age can be counted if they continue their studies; children of any age are counted if they are fulfilling their military service.
In the nation of Voltaire and quotas against Hollywood films, there is a special category for income from intellectual property rights.
France is one of the few remaining holdouts of a pay-as-you-earn tax system. Here employees pay taxes on income earned in the previous year, putting salaried employees and the self-employed in the same boat. But increasingly, taxpayers are opting to pay estimated taxes automatically on a monthly basis.
Might as well make the tax collector's job easier, after all.
''Taxes -- there's no escape,'' says the night watchman outside a city tax-collection bureau in Paris. ''They will find you, for sure.''