The history of the state is closely entwined with war. For example, Mann (1980: 197) estimates that between 1130 and 1815, the English state spent somewhere between 75 and 90 percent of its financial resources on the acquisition and use of military force. Today, although the nonmilitary responsibilities of governments have vastly expanded, war making and national defense remain a central responsibility of most governments. That military activities use resources is well known. What has been less studied is the extent to which popular wars may build social identity and thereby reduce the cost of government mobilization of resources and the extent to which unpopular wars may do the opposite.

This chapter explores the relationship between citizens' willingness to comply voluntarily with tax obligations and the perceived military threat to a country, as well as the relationship between citizens' willingness to comply and their attitudes toward ongoing military action. To the extent that military threats lead individuals to identify with their government, society, and country, the tax authority can reduce enforcement efforts because the citizens' willingness to voluntarily comply acts as a substitute for the threat of detection and penalties. Taxpayer consent to taxation at a particular moment would therefore be due, in part, to the accumulation of conflicts and their nature over time. As Eisaku Ide and Sven Steinmo argue in Chapter 7, taxpayer consent hinges in part on those aspects of a nation's history that determine the collective willingness to sacrifice.

We appreciate guidance on data questions from Richard Denesha, Donald Lee, John Miller, and Dick Teed. We are grateful for comments on a presentation of preliminary results received from Charles Brown, James Hines, and other members of the University of Michigan public finance workshop and for comments received at the conference from discussants Joe Bankman and Brian Erard, and several other participants.

The Internal Revenue Service (IRS) provided confidential tax information to one of the authors pursuant to provisions of the Internal Revenue Code that allow disclosure of information to a contractor to the extent necessary to perform a research contract for the IRS. None of the confidential tax information received from the IRS is disclosed in this chapter. Statistical aggregates were used so that a specific taxpayer cannot be identified from information supplied by the IRS. Information in this chapter that identifies specific companies was not provided by the IRS and came from public sources, such as reports to shareholders.

Introduction and motivation

This chapter examines the extent and nature of corporate tax noncompliance using previously undisclosed Internal Revenue Service (IRS) operational audits and appeals data merged with confidential tax return data. The extent of tax noncompliance is primarily measured as the level of proposed tax deficiencies under IRS audit, although we also investigate the amount of the proposed deficiencies that are upheld after taxpayer appeals.

Modern governments have taxed income earned by corporations for as long as they have taxed income earned by individuals, yet the economic effects of corporate income taxation remain shrouded in mystery, and the appropriate role of corporate income taxation in generating significant government revenue is as unclear now as it ever was. At the onset of the 21st century, governments continue to rely on corporate income taxes as important revenue sources, the product of uneasy compromises between some forces that would reduce, and others that would increase, the tax burden on corporations.

The ability, and evident willingness, of corporations to locate and structure their activities to avoid corporate income taxes is always an important consideration in the design of corporate tax policy. Governments in an increasingly competitive world face pressures to reduce their tax rates, lest corporations relocate their activities elsewhere in search of more hospitable tax climates. Quite apart from their relocation incentives, high corporate tax rates encourage firms to undertake transactions designed to reduce taxes rather than stimulate productivity and may also have the undesired effect of discouraging business formation and expansion. In most countries, corporate income may be taxed twice – first when earned by corporations and second when received as dividends by taxable individual shareholders – which, in the eyes of some, is unfair, inefficient, and just cause for significant reduction of either corporate- or shareholder-level taxation.

INTRODUCTION

Tax professionals are not inclined to replace the graduated income tax as the backbone of the federal tax system or abandon the property tax and sales tax as important features of the local and state revenue systems. They do, though, on average favor some significant reforms of the federal tax system, such as integration of the corporate and individual income tax, comprehensive inflation indexing, and elimination of the mortgage interest deduction. With regard to state and local taxes, a majority favor extending the sales tax to services, increasing reliance on user fees, and eliminating homestead exemptions from the property tax.

These are a few of the results of a tax policy opinion survey sent out on April 28, 1994 to the 1309 American and Canadian individual members of the National Tax Association (NTA). Of the 1309, 521 were academics, 406 were employed by a government or international agency, and 382 were in the private sector. There were 503 responses received before the cutoff date, representing an overall response rate of 38 percent, which is on the high side for mail surveys, especially ones for which there was no follow-up notice sent to those who did not respond promptly. The response rate was 45, 32, and 28 percent, respectively for academics, government, and the private sector. Although the response rate was relatively high, the nonresponse rate is certainly high enough to leave open the possibility that those who responded are not representative of the NTA membership.

THE REAL WORLD

Over the past half century, the academic analysis of taxation has become more technical, increasingly involving sophisticated mathematics and statistics. For this reason, its language and reasoning have become less and less accessible to those outside academia. Academics hoping to influence the policy process have to think carefully about how to “translate” what they know into what can be convincing and useful for policy. Even those who think carefully about this translation have, I suspect, often been greeted by a dismissive reply that begins, “Yes, but in the real world …”

What is it about the real world, or about the modern analysis of taxation, that reduces the potential contribution of academics to the policy process? I can think of four problems.

The purpose of the Symposium section of the National Tax Journal, which debuted in the June 1993 issue, is to bridge the gap between academics and those who live in the trenches of the real world. For each Symposium, experts—both scholars and practitioners—were commissioned to write nontechnical papers on the leading policy issues of the day, or to reflect on what first principles should inform the policy process.

The question of tax progressivity – who should bear the tax burden – has fascinated tax philosophers for over a century, and remains highly controversial in the 1990s. The ultimate answer to this question depends on ethical judgments into which the field of economics offers no insight, but it also depends on some of the bread-and-butter preoccupations of economics, such as the extent and nature of income inequality and the behavioral response of taxpayers to alternative tax systems.

In an effort to contribute to this ongoing policy debate, the Office of Tax Policy Research commissioned nine studies on the economic issues that are relevant for choosing the appropriate degree of tax progressivity. These papers were presented at a conference held at the Michigan Business School on September 11–12, 1992. This volume begins with an overview chapter and then presents the nine commissioned papers, each followed by the remarks delivered at the conference by a formal commentator and a synopsis of the general discussion that followed the conference presentations.

I would like to thank the Bradley Foundation for providing the financial support for this conference. The conference project could not have been successful without the efforts of Mary Molter, who provided all of the logistical support in her usual professional and cheerful manner. Thanks are also due to Marta Diaz, David Hummels, and Alec Rodney, who helped prepare the general discussion synopses.