(Article changed on May 28, 2013 at 21:44)
A key element in America's social contract is the idea that government derives its authority from the consent of the people. So the question should occasionally be asked, is our mutual consent to be governed wearing thin? There is evidence to suggest a growing restiveness in certain populations. Some symptoms of declining consent include gridlock in congress marked by an inability to pass any legislation on a simple majority vote, the resurgence in states' rights activism, calls in some states for secession, citizens arming themselves in fear (or perhaps the hope) of armed resistance, and widespread efforts to manipulate elections. Perhaps the best, most quantitative way to judge the degree to which we consent (or commit) to self-government is by our willingness to pay taxes.
The attitudes we have toward paying taxes, and the extent to which people and organizations will go to avoid them, is an underappreciated index of our consent to be governed. Just as taxation without representation was a rallying cry leading up to the Revolutionary War, the Tea Party and many other popular reform or resistance groups today rally around taxes as a central point of contention. Objectively speaking, the Tea Party's opposition to taxes makes no sense since their complaint corresponded with the lowest federal tax rate since the Eisenhower administration. It isn't until we understand that our attitude toward taxes is a barometer of our consent to be governed that the Tea Party's tax objections become clear.
For the sake of discussion it is helpful to identify different segments of the population that are particularly opposed to taxes. But keep in mind that our personal attitude toward paying taxes is just as valid an indicator of where each of us falls on this measure of consent.
Let's begin with those who see themselves through the lens of American individualism. They value self-reliance and see this as a patriotic duty. They tend to think less of those who are more collaborative, more dependent, or less successful. They tend to discount the contribution of the public commons to their own welfare and don't often recognize how massively interdependent advanced societies really are. They believe that less government is best for everyone. These folks are less willing to contribute to tax-supported government services other than for military defense. They are ideological individualists. This group may include some libertarians and on the extreme fringes may also include some anarchists or survivalists.
There are those who are suspicious or uncomfortable with American pluralism. These folks tend to live in parts of the country where there is little diversity or just a single predominate minority group. However, folks who hold this belief can be found everywhere. They believe a disproportionate amount of their taxes go to support other ethnic or cultural groups whose members don't share their same values or work ethic. They may fear that these other groups are taking advantage of government largess. As a result, they are more resentful of paying taxes and more critical of what they see as wasteful government spending. These folks are pluralism-averse and at the extreme fringes this group may include racists or hate groups. A highly nationalistic subset of this pluralism-averse group believe their government has already broken faith with them and is threatening their liberty. For them, paying taxes is akin to paying tribute to a foreign potentate. The most extreme of these consider themselves to be sovereign citizens.
There are some religious fundamentalists who believe all secular government is evil. Some fundamentalist sects focus on The Book of Revelations and an apocalyptic view of the world in which governments play a role in the rise of the false prophet. For these groups anything that expands government is evil as well, including increased taxes. They are usually considered to be on the fringe of the Christian community, but they have an impact beyond their numbers.
Then there are those who believe taxes compete or interfere with commerce and free markets. They believe that taxes reduce the capital available for businesses investments. They fear that more taxes will lead to more government regulations and further hinder commerce. They don't see government spending as stimulative for the economy. For them, the provision of government services to those who aren't successful contributors is an unfair redistribution of wealth. Members of this group are more likely to have higher incomes and a sense of entitlement. They may pride themselves in their ability to avoid paying taxes. At the extreme fringes of this group members tend to see society as being made up of the haves and the have nots, the makers and the takers. They are often contemptuous of taxes and government.
Next, there are the disaffected and those too self-absorbed to care much about government. For this group all taxes are an annoyance to be avoided. This is a large and diverse group that is often underrepresented in our national conversations. They include many who are poor, but also many who are middle-class folks working hard just to make ends meet. They tend to be swing voters when they vote and their grasp of politics and government policies are more malleable. The underground cash economy is significant for them.
The impact of this growing reluctance by some citizens to pay income taxes is huge. According to a GAO report called "HIGH-RISK SERIES, An Update", the Internal Revenue Service estimated that the gross tax gap--the difference between taxes owed and taxes paid on time--was $450 billion for tax year 2006. The IRS estimated that it would collect $65 billion from these taxpayers through enforcement actions and late payments, leaving a net tax gap of $385 billion. This doesn't include the loss of tax revenue due to the underground cash economy and foreign US-cash transactions. These create an additional tax gap estimated to be between $400 billion and $540 billion annually. There is also the tax gap created when wealthy investors hide their money in off-shore tax havens. According to a study by the Tax Justice Network the world's super rich have at least $21 trillion secretly hidden away in tax shelters as of 2010. This is equivalent to the size of the Japanese and United States economies combined, according to The Price of Offshore Revisited report. Further, the amount of secretly hidden wealth may be as high as $32 trillion.
Arguably the most tax-resistant groups, which also have the greatest fiscal and political impact, are businesses and corporations. The largest loss of tax revenue, representing the lowest level of consent to be governed, comes from the corporate sector. The shift in the percentage of total federal income taxes paid by individuals versus businesses has grown substantially over the years. Individual income taxes raised 41% of total tax revenue in 1943 while business income taxes made up the rest, or more than half of the income-tax receipts. Compare this with today where 79% of total revenues comes from individual income taxes. This shift in tax receipts from corporations to individuals cannot be explained by a shift away from C corporations (who pay corporate income tax) to S corporations (who don't). According to the financial site NerdWallet, the 10 most profitable U.S. companies paid an average federal tax rate of just 9 percent in 2011. The group includes such giants as Exxon Mobil, Apple, Microsoft, JPMorgan Chase, and General Electric. The Economist recently posted a graphic by the Bureau of Economic Analysis that depicts the decline in corporate taxes juxtaposed to the rise in corporate profits.
American Corporate Profits and Income Taxes by The Economist
The inability of the federal government to collect taxes from the nation's elite and its biggest corporations is a serious sign of trouble. It signals a real strain in our social contract and severly limits the ability of the government to serve its people. The problem is compounded by the fact that anti-tax sentiments are being exploited by wealthy business interests to foment dissatisfaction and distrust of our government. A coalition of the most anti-tax, anti government constituents from the various tax-averse segments of society described above would look very similar to the Tea Party base of today's Republican Party. The power we invest in civil government is the only check we have to balance the power of the largest corporations to do as they wish in pursuit of profits. It would be a mistake to weaken our commitment to good government now when it is under assault.
There are still many who believe taxes are the price we must pay for a just and robust society. Paying taxes is our civic duty and evidence of our commitment to one another. It reflects confidence that our government is representing us and upholding the social contract. The present IRS scandal over the targeting of Tea Party groups for selective scrutiny of their 503(c)4 tax status is really a minor but convenient distraction from the real tax crisis we face. We are facing a crisis of confidence in self-government. It is a challenge of our time to rekindle a popular passion for civil government that is truly of, by, and for the people.