Legal Commentary

My trip home from the airport yesterday was my first ride in a metered D.C. cab.  As reported at the CoOp by Larry Cunningham, the D.C. taxi system recently switched over from their infamous "zone" system to computerized metering by time and distance.  This produced much bellyaching from cabbies, not because they enjoyed swindling tourists, but rather because they now have to pay taxes.  Their incomes are newly subject to audit -- the meters produce a record of receipts (minus tips), while the zone system was a cash business.  This means as much as a 30+% cut in take-home pay.  (Well, except for the one(s?) who were reporting their income voluntarily.) 

For me, as a former tax-enforcement official, the most interesting question here is why the D.C. Cab story isn't more popular (and it can't all be Mr. T's acting).  That is, why don't governments require industries to structure their transactions in ways that facilitate tax enforcement ?  That would distribute the true tax burden more equitably, instead of randomly favoring people who are self-employed or work in all-cash industries.  But, as Kaplow & Shavell would remind us, in exchange for this increase in fairness there would be some welfare losses from changing the market's most-preferred transaction structure.

Or would there?  What the D.C. story illustrates for me is that the scheme the market has chosen might itself be driven by tax-avoidance, not efficiency.  Changing to meters might be *both* more fair and more efficient.   And fairness sometimes has welfare benefits: reducing evasion would allow lower rates on those of us who pay all our taxes now, which should diminish what economists call the "excess burden" or deadweight loss of the tax.

Lesson: Let's all grow mohawks and wear large gold chains.