Social Scientists Develop Profile To Spot Likely Tax Evaders

Transcript

STEVE INSKEEP, HOST:

Next, we have research suggesting how to spot tax evaders - in particular, tax evading corporations. This research may make some people uncomfortable, though, because it suggests you can predict a company is more likely to cheat on its taxes based on which country the owners come from. NPR social science correspondent Shankar Vedantam has been looking into this. Hi, Shankar.

SHANKAR VEDANTAM, BYLINE: Hi, Steve.

INSKEEP: I'm already bothered by this because it suggests you should profile people from different countries, but what's the research?

VEDANTAM: Well, we'll get to that in just a second, Steve. Jason DeBacker at Middle Tennessee State University used to work at the Treasury Department. And he realized that he could analyze the audits that the Internal Revenue Service conducts on corporations. So what he did was he looked at 25,000 audits of companies with at least 25 percent foreign ownership. Here he is.

JASON DEBACKER: What we find is that foreign-controlled corporations with owners from more corrupt countries evade more U.S. tax as measured by the IRS. So you get this strong relationship between corruption in the home country of those foreign controllers and the evasion in the U.S.

INSKEEP: I need a definition of terms here. What does he mean by more corrupt countries?

VEDANTAM: So corruption and tax compliance vary very widely from country to country, Steve. DeBacker told me that if you look at corruption levels in different countries, the rate of tax evasion in some countries is much higher than it is in others. Here he is again.

DEBACKER: For example, in the U.S., the noncompliance rate with the income tax is about 17 percent. If you look at Sweden, it's only 8 percent. If you look at Greece, it's almost 38 percent. And so that just begged the question, you know, how important are these cultural factors in tax compliance?

INSKEEP: OK, so he's got a way to identify which countries seem more corrupt to him. But then this next step, when he looks at the owners of different companies from the more corrupt countries, they are more likely to be corrupt.

VEDANTAM: That's exactly right, Steve. DeBacker and his colleagues - Bradley Heim and Anh Tran - say they wanted to explore the idea that attitudes about taxes are shaped by norms and cultures and these norms and cultures can travel. So one thing they find is that there's a stronger connection between foreign corruption and U.S. tax evasion among smaller companies than larger companies. To be fair, Steve, what we have here is a correlation. We don't actually know how or even whether one thing is actually driving the other. What I found interesting about this work is that it reflects and matches what other social scientists have found. A few years ago, the researchers Raymond Fisman and Edward Miguel found that United Nations diplomats in New York City from countries with higher levels of corruption were more likely to park their cars illegally in New York than diplomats who came from less corrupt countries. So there's some evidence that norms travel, and people bring attitudes about abiding with the law with them to the United States.

INSKEEP: Some of that is just intuitive. You learn the methods of the place that you're from, but here's why this is all so disturbing. I'd really rather not assume that the next Nigerian I meet or the next Pakistani that I meet is probably corrupt. That's really not comfortable.

VEDANTAM: I think that's exactly right, Steve, and I don't think anyone is suggesting that the IRS used this information to start profiling people or profiling corporations. First of all, that might not be legal to do. Second of all, the problem with profiling is it tends to harm lots of innocent people. It produces lots of what social scientists would say are false positives. There's a second problem with profiling, Steve, which is if you're going to start profiling corporations for audits, you might not start with the foreign corporations. DeBacker told me that, on average, U.S.-owned companies tend to evade taxes more than foreign-owned corporations. So if you're going to start painting with a broad brush and profiling large groups, you might want to focus first on U.S.-owned corporations.

INSKEEP: So the way to get rid of corruption in America is to get some of those Americans out of there.

VEDANTAM: (Laughter) I didn't say that, Steve. You did.

INSKEEP: Shankar, thanks very much.

VEDANTAM: Thank you.

INSKEEP: That's NPR's Shankar Vedantam. Transcript provided by NPR, Copyright NPR.