Investment Contrarians

Budget Deficits Grow as Millions of People Continue to Evade Taxes

By for Investment Contrarians |

budget deficitsOne of the common themes around the world is the growing level of government debt due to high budget deficits. Budget deficits occur when spending is greater than revenue. Taxes are the main source of revenue for governments; taxes decrease with a slow economy. A slow economy means fewer employees, which means less revenue from income taxes and lower taxes on goods purchased. This increases budget deficits, which then adds to the rising total of the government debt.

This is not a problem that exists solely on American shores. A big issue around the world is how to tax the wealthy. While many in America believe that increasing taxes for the wealthy will decrease the budget deficits and, in turn, eventually decrease the government debt, the problem is more severe in some nations.

In a recent study to determine the number of Greek citizens who pay taxes, approximately 70% of Greeks were found to underreport their income. The results from the study showed that undeclared income totaled in excess of 10% of Greece’s gross domestic product (GDP) for 2009, or 28.0 billion euros. Because this income was not declared, the Greek government lost 11.2 billion euros in taxes, or approximately four percent of GDP. (Source: “Wealthy Greeks Still Don’t Pay Taxes,” Der Spiegel, November 1, 2012.)

That is a truly staggering amount relative to GDP, which is exacerbating the budget deficits and the growing government debt. This lack of revenue is pushing the government to enact further spending cuts, of which the average citizen is feeling the full effects, including massive pension cuts. Reducing budget deficits is extremely important for the government to balance its books, but this type of illegal activity hurts the entire economy and a large percentage of the population.

In the report, a glaring example of the pervasiveness of undeclared income is that only 200 people earn over 500,000 euros in Greece. The public’s calls to raise taxes on the rich would do nothing, as they don’t pay many taxes at all.

Of course, not all of the people evading taxes are super rich. The report cited lawyers, journalists, entertainers, and doctors as being the biggest culprits. The more the public believes tax evasion is normal, the more people will engage in hiding their income. This creates a snowball effect, which leads to higher budget deficits and higher government debt. The lack of revenue from income taxes means more cuts, which means less jobs and even lower revenue.

What can be done about this problem? Simply raising taxes won’t do much if approximately 70% of the public already doesn’t disclose their full income. Obviously, the tax evasion has to end. I hate to recommend such a draconian idea, but for many countries with tax evasion problems, having a system in which there is only electronic currency would help solve the problem. If there is no paper and every transaction occurs electronically, then the government can track every dollar earned within the economy. With the debit system becoming more prevalent, we’re already moving toward this route.

Of course, this would raise various privacy issues. Do citizens want the government to know everything they do? The final determinant is to understand what is most important in a society. In countries such as Greece where budget deficits are out of control and government debt is skyrocketing, simply having 100% of the public report their actual earnings would be a big step in helping the country’s economic situation. This would mean fewer austerity cuts, as revenue would increase without raising the tax rate. The U.S. also has out-of-control budget deficits, but our problems are quite different. We have too many loopholes and deductions that need to be eliminated and structural changes that need to be made to reduce the budget deficits and begin paying down the government debt.

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  • Teila K. Day

    Let's talk about tax evasion AFTER governments stop wasting monies that they've collected. Until then… all bets are off. Period.

    So, what else is happening in the news?

  • Julie

    I Agree with Teila and would like to add that Americans are taxed in may ways not just by income tax. SSI tax, medicare tax, sales, tax, gas tax, tobacco tax, if you need a permit for anything the price of that is a city tax. The list goes on and on! the point? Governments want your money and we are sliding into a Socialist state. Oh, and the budget deficit? Maybe Washington needs to learn how to balance a check book first and stop bailing out Billionaires while while millions of people keep losing there jobs and homes! Stop spending and they wouldn't need so many taxes.

  • Julie

    OH! posted before I read the last 2 paragraphs! This is a very bad idea to go to all electronic spending. I am sure you mean well and seem to truly want a solution the the huge issue of budget. Here is why. If we are required to go to all debit/electric money we soon will be required to be chipped. Look up RFID chip. The government is already to do this. To me this is very close to the Mark of the Beast and I don't really want anything shoved in my body thank you. Also the more we get away from the gold standard the more worthless money is. Look at the printing presses running overtime to shore up the debt. The rug is getting ready to be pulled out and then hyperinflation will kick. If everything goes electronic then the government can force compliance by cutting off the card. Scary stuff and not a solution. Sorry no go!