Self-Employment and Tax Evasion

by Reihan Salam

Back in June, I argued that self-employment is not a good proxy for entrepreneurship, a hobbyhorse of mine. I was responding to a blog post at the New York Times which singled out Greece for having an unusually high rate of self-employment. Want to know why Greece has such a high rate of self-employment? Suzanne Daley of the Times gives us a valuable hint:

[L]ast year, Greek officials collected even less than the year before. Some of the decline in revenues resulted from the decline in the economy. But some new tax collection strategies — incentives to collect receipts so that fewer business could work off the books, for instance — backfired and actually reduced people’s tax bills.

And the state seemed to make little progress in getting the scofflaws to pay. Some 70 percent of the tax collected came from salaried employees and retirees, who have little way to hide their income. Meanwhile, 7 out of 10 self-employed workers, including doctors, dentists, engineers, accountants, taxi drivers and small business owners, indicated on their tax forms that they had made less than $16,000 a year, a figure that most experts find laughable. [Emphasis added]

“Self-employment” in countries like Greece is essentially a tax avoidance strategy. The reason the U.S. has a relatively low level of self-employment is partly because our tax system has been somewhat less punitive. As taxes increase, we can expect “self-employment” levels in the United States to increase as a growing number of workers try to evade taxes and regulations governing employment. And advocates of much higher taxes will react to disappointing revenue projections with calls for taxes that are higher still or taxes that are harder to evade, like the VAT. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.