Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

When taxpayers make up numbers, it's fraud. When the government does it, it's a 'probabilistic estimate.'

November 04, 2009

This is a truly awful idea from a Michigan professor named Kyle Logue:

This Article highlights the primary tax enforcement problem in the United States, that of noncompliant small and medium-sized businesses (“SMBs”), and it explores the possibility of a radical solution: shifting away from the current system that attempts to tax the actual individualized income of each business and toward a system that taxes only a rough approximation (or probabilistic estimate) of business income.

Some states, Texas among them, do this already. If they don't see a tax return (or sometimes even if they do), they assess the taxpayer based on the scientific wild-assessed guess (SWAG) method, forcing the taxpayer to prove the invented numbers wrong. But at least the taxpayers get to counter the SWAG assessment with real numbers.

This sort of presumptive tax approach has been used for years in developing economies, where the problem of SMB noncompliance is even worse than in the U.S. This Article suggests that the time may have come for taxing SMBs in the U.S. on a presumptive basis as well.

Interesting thinking. Non-compliance is even worse in other places, so we should follow their example? Maybe non-compliance is worse because they know that no matter how much they report, the "probabilistic" estimate will always assess them even more. That's part of why they're still "developing" countries.

This regime would thus produce a sort of probabilistic taxation of SMB income. Whether such a regime would make sense depends on a number of key unanswered questions, including how narrowly and accurately such historical line-of-business profit percentages can be drawn and at what cost.

It would never make sense. Every business is unique. It's not uncommon for one competitor to be profitable and one to be losing money -- and then to change places in a year or two. To assess income taxes based on industry averages would be absurd. You might as well just abandon the income tax and assess based on gross receipts -- at least then there would be no pretense that you were assessing "income."

Via the TaxProf.

Tags: dumb.tax policy.TaxProf.