Tipping Point for Tax Cheats?

Barry Goldwater said “The income tax created more criminals than any other single act of government.” Today, small business owners have to contend not only with a federal income tax, but also with a myriad of taxes and government-imposed fees at the federal, state, and local levels, and these taxes and fees are rising.

  • At the federal level there is growing number of excise taxes (for example, the new 10% tax on tanning salon services starting July 1). And it looks like federal income taxes will rise substantially after 2010, with, among other things, a hike in the top individual tax rates and capital gains rate.
  • At the state level, in some locations there has been a rise in sales taxes (while not technically paid by businesses because it is imposed on customers, a higher sales tax does serve to depress sales) and fees for licenses and permits.
  • At the local level, there continues to be hikes in property taxes, as well as charges for licenses and permits.

I’m afraid that we’re reaching a point where owners will feel justified in not paying their taxes. Once this happens, tax cheat fever can spread. The “tax gap"  -- the spread between what the government thinks it should collect and what it actually collects, which is already at $345 billion -- will continue to widen. (The IRS already suspects that a large chunk of the gap is attributable to self-employed individuals who fail to report income and/or overstate deductions.)

Ultimately, this can lead to a Greece-like economy where corruption is the rule, only a handful of people pay taxes, and the national economy is essentially bankrupt.

New York’s commuter tax
Last year, New York started to charge self-employed individuals and small businesses in the suburbs of New York City a so-called commuter tax, even if they never venture into New York City. This Metropolitan Commuter Transportation Mobility tax, while relatively small in amount (for a self-employed individual it is 0.0034 of net earnings from self-employment), is still onerous. The tax is payable three times a year (not the same dates as income tax, estimated tax, or payroll taxes). And it is on top of all the other taxes and expenses imposed on small businesses. And there is little perceived benefit to those paying it, especially those who do not do business in New York City.

One business owner I know has reached a tipping point and won’t pay the tax until the state comes knocking. Is this indicative of the start of tax cheat fever?

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