Chapter 15

How Societal Pressures Fail

Let's start our discussion of societal pressure failures with an example: taxes. Paying taxes is a classic free-rider problem; if almost everyone cooperates by paying taxes, defectors get all the benefits of whatever those taxes are paying for without having to suffer the financial penalties of actually paying.1 There are laws and enforcement, but at least in the U.S., with the exception of payroll taxes, income tax is almost entirely enforced by voluntary compliance. It's not just a financial risk trade-off; there are two pieces of moral pressure at work here: people paying taxes because it's the right thing to do, and people paying taxes because it's the law and following the law is the right thing to do.

Still, there's a lot of fraud in the U.S. According to the IRS, in 2001—the most recent year I could find comprehensive numbers for—the difference between total taxes owed and total taxes paid was $345 billion; about 19% of the total taxes due. A third-party estimate from 2008 tax returns also showed a 19% tax gap. Note that this gap is in the percentage of money owed, not the percentage of cheaters. By one estimate, 25% of individuals admit to cheating on their taxes. On the other hand, a single corporation avoiding billions in taxes costs taxpayers vastly more money than many thousands of waiters lying about their tip income.

There are many reasons people cheat on their taxes, and they all point to failures of societal pressure. First, ...

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