U.S. Tax Evasion: A Major Free Rider Problem

We have discussed the basics of public goods and externalities in Samuelson's paper "The Pure Theory of Public Expenditure", which detail the function of public goods and its two notable characteristics of being non-rivalrous and non-excludable.  It is important to note that the free rider problem stems from its non-excludability, meaning that that certain good cannot be excluded and will be difficult to restrict access to the good based on price.

The question begs to be asked if America is slowly becoming a nation of "Free Riders" with tax evaders. The argument holds that those who evade in taxes are labeled as free riders because it "creates horizontal inequalities, since equally well off people share different tax burdens."  This is because the government is deprived of revenues from tax evasion that could have been set aside for the production of public goods.  There's a huge irony here.  We have learned (and the author mentions this as well) that the free rider problem generally arises in common property resources or even in the provision of private goods.  So, it would "be necessary to use enforcement mechanisms of taxes and/or user charges with the force of the law."  The tax system that was meant to solve the free rider problem in the first place has its OWN free-rider problem!

But this is where it ties in to Samuelson's argument.  The author states that "tax evasion, if pervasive due to lack of monitoring and enforcement, may necessitate higher tax rates, thus causing further evasion and loss of productivity and income."  Samuelson would argue that individuals are rational and base their decisions on what is in their best economic self-interest.  The reality, whether we like it or not, is that these tax-evading individuals are acting economical and according to their self interest, as they have realized that there is a much higher Marginal Benefit to avoiding taxes legally than their Marginal Cost (in this case, the financial cost of paying taxes that will be allocated to the government for public goods if they didn't decide to tax evade).  Why pay taxes if you can free-ride off the public goods provided to you if it's not excludable?