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Episode 531: The Tough, The Sweet, The Nosy

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Episode 531: The Tough, The Sweet, The Nosy

Episode 531: The Tough, The Sweet, The Nosy

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CAITLIN KENNEY, HOST:

As you're working on your taxes this weekend, totally miserable, we'd like to give you a little inspiration. We're going to introduce you to a man you should keep in mind while you're juggling those deductions and those exemptions - Wesley Snipes.

(SOUNDBITE OF FILM, "NEW JACK CITY")

WESLEY SNIPES: (As Nino Brown) I'm not guilty. You're the one who's guilty - the lawmakers, the politicians, the Colombian drug lords.

ROBERT SMITH, HOST:

Wesley Snipes' inspiring performance from the film "New Jack City." He is, of course, a famous actor. He has been in dozens of films. But we are talking about him today because he is famous for another reason. He failed to file his tax returns for years on $40 million worth of income, according to the IRS. He was convicted, went to jail for two and a half years, and he has to pay $17 million in back taxes.

(SOUNDBITE OF FILM, "NEW JACK CITY")

SNIPES: (As Nino Brown) This is big business. This is the American way.

KENNEY: And we bring up Mr. Snipes not because we're trying to scare you into paying your taxes. In fact, he may teach us the opposite lesson because as crazy as it sounds, Wesley Snipes, by not paying his taxes, was actually acting in an economically rational way. He'd been cheating on his taxes for years. And no one seemed to notice that this incredibly rich and famous person had failed to file tax returns.

SMITH: Snipes was doing what basically everyone does when they fill out their taxes. They're making a mental calculation of the costs and the benefits of lying.

JAMES ALM: The benefits are clearly getting away with not paying taxes. The costs are getting caught.

KENNEY: This is James Alm. He's a professor and chair of economics at Tulane University. And he's been studying tax evasion for years. He says that for people who are self-employed or take certain kinds of deductions, there's actually a big financial incentive to pull a Wesley Snipes.

ALM: For those types of income and reporting, your chances of getting caught are really pretty low. And even if you're caught the penalties that you would pay would not be all that great. And so on those types of reporting, we should see people cheating more than they do.

SMITH: Wesley Snipes got caught, but millions of other people in the U.S., they never get caught. They get away with it. And the IRS seems to be powerless to stop them.

KENNEY: Hello, and welcome to PLANET MONEY. I'm Caitlin Kenney.

SMITH: And I'm Robert Smith. Today on the show how to get people to pay their taxes when the rational thing to do is to cheat.

(SOUNDBITE OF MUSIC)

SMITH: This isn't just a problem in the U.S. American taxpayers are Dudley Do-Rights compared with people in some other countries.

KENNEY: And so on the show today, we're going to head to be cheatingest (ph) places on earth to bring you tales from some of the roughest, toughest tax collectors around. They have tricks, special tax collector mind games that they play to get people to do the right thing - to pay their taxes.

SMITH: Just so you know, this show was originally reported and recorded in 2014.

(SOUNDBITE OF MUSIC)

SMITH: The fundamental problem is this - people know that they should pay their taxes. It is the law. But it's so tempting to cheat. Tax collectors can't be everywhere. They can't know everything. Cash is untraceable. And when it comes to the moment when you report your income, when you actually sign that form, you are generally alone. No one is looking over your shoulder. No one is going to know.

KENNEY: All of the tax collector tricks we're going to talk about today share something in common. They're designed to make you think twice in that private moment, to make you sort of turn around and think, maybe someone's watching me after all.

SMITH: The first stop on our tax enforcement tour? The Philippines. And we picked this country because this is one of those places where people do not pay their taxes, where there's a high level of corruption. And they have an interesting solution there in the Philippines. Their solution? Make the tax collector famous.

KENNEY: Normally the head of the internal revenue is this faceless bureaucrat, but not in the Philippines. She's a celebrity.

KIM S. JACINTO-HENARES: My name is Kim S. Jacinto-Henares. I'm the commissioner of internal revenue of the Philippines.

KENNEY: All right, let me describe Kim for you because her secret weapon is her tough image. She's got this short cropped hair, she kind of dresses like an off-duty cop. And she has this expression on her face that says you're lying to me and I know it.

SMITH: And here's the kicker. When she's photographed, she is invariably holding a gun or actually shooting a gun. And this isn't just her little automatic pistol which she carries around. She is shooting assault weapons. When Filipinos think of tax collectors, that is their image, a woman with a very large gun.

KENNEY: And Kim says before she took office there was this certain mentality in the Philippines that it's no big deal to cheat on your taxes because what's the worst that's going to happen?

JACINTO-HENARES: For years, people think that anyway, when they get caught, they can always talk their way out of it, pay their way out of it, or they can always wait for an amnesty program.

KENNEY: So Kim decided to look deep into the hearts and minds of her countrymen.

JACINTO-HENARES: If you look at the psyche of the Filipino, how do you make them toe the line? It's either they realize that they will be punished if they do something wrong or they will be facing an embarrassing situation.

SMITH: The Philippines has almost 100 million people. And so the idea isn't that Kim is going to flash her gun at every tax cheat. She has a much more targeted plan. She is going to go after the big dogs, the most high-profile tax evaders. You know that old thing that you always hear in all the prison movies, that on your first day in prison, you're supposed to take down the biggest, meanest guy in the yard and then everyone will be afraid of you?

KENNEY: That was Kim's plan. And in the Philippines, when you ask - who's the toughest guy around here? - there's only one obvious answer.

(SOUNDBITE OF FILM, "MANNY")

MANNY PACQUIAO: When I was a boy, I had to fight to feed my family. My entire life, I fought to survive. Boxing was my only hope.

SMITH: Manny Pacquiao, the legendary Filipino boxer - he is a man who famously rose from poverty to become one of the richest athletes in the world. Super famous in the Philippines, he even won a seat in Congress. The dude is on a postage stamp there.

KENNEY: And Kim says when she got the job, she went down this list of the richest people in the Philippines. And there was Manny Pacquiao. And strangely, when she checked, she realized he was paying less taxes than he had the year before, even though he was clearly more famous, more successful.

SMITH: So Kim looks into it, and she finds that Pacquiao owes $50 million in back taxes. And so she did something that people tend to not to do in the Philippines. She went after somebody famous. She froze his bank accounts. She garnished his wages, levied his property. And this whole process did not stay a secret.

(SOUNDBITE OF NEWS BROADCAST)

UNIDENTIFIED REPORTER: (Speaking Tagalog) - Manny Pacquiao - (speaking Tagalog).

KENNEY: Pacquiao said it was unfair. But it was shrewd on Kim's part. Think about it - the best way to get famous as a tax collector is to go after famous people. And when the tax collector's famous, people are more likely to pay their taxes.

(SOUNDBITE OF NEWS BROADCAST)

UNIDENTIFIED REPORTER: (Speaking Tagalog) - tax records - (speaking Tagalog).

SMITH: Kim went after the former president's son. Kim went after famous socialites. The more attention she got, the more people were afraid of her. And so basically she started to look for targets on the society pages.

KENNEY: Her staff stumbled on these pictures of Jeane Napoles, a young, rich daughter of a very successful businesswoman.

JACINTO-HENARES: Her Instagram or her Facebook show her in a bathtub for the money. no? So...

KENNEY: Wait - literally in a bathtub full of money?

JACINTO-HENARES: Yeah. There's a Facebook page. But things in the social media are also reported in our traditional media.

SMITH: Luckily, all this social media has become a guide to unreported income. We found this crazy video of Jeane Napoles' 21st birthday party at a fancy hotel in Beverly Hills. And you can sort of a picture Kim and her staff at the Internal Revenue Service watching this video and just adding up all of the expenses.

(SOUNDBITE OF SONG, "TILL THE WORLD ENDS")

BRITNEY SPEARS: (Singing) Oh, oh, oh, oh, oh, - oh, oh, oh, oh, oh, oh, oh...

KENNEY: So let's describe this video for you. It starts with these quick images of the logos of liquor bottles - Grey Goose, Maker's Mark - and then it's this red carpet. There's a fashion show at one point. I counted - she wears six different dresses in the course of this one birthday party.

(SOUNDBITE OF VIDEO, "JEANE NAPOLES' 21ST BIRTHDAY PARTY")

UNIDENTIFIED MAN #1: You are jam-packed with awesomeness.

UNIDENTIFIED WOMAN #1: Happy 21st birthday.

UNIDENTIFIED MAN #2: Hey, Jeane.

UNIDENTIFIED MAN #3: I love you.

UNIDENTIFIED MAN #4: Thumbs-up.

UNIDENTIFIED WOMAN #2: You look so hot.

UNIDENTIFIED WOMAN #3: So hot.

UNIDENTIFIED WOMAN #4: So, so hot.

UNIDENTIFIED PEOPLE: Happy Birthday, Jeane.

UNIDENTIFIED WOMAN #5: It's finally legalized.

UNIDENTIFIED MAN #5: I wish you all the best...

SMITH: The bill for this party must have been huge, especially when you consider what happened afterwards. Our tax collector, Kim, decided to go after the debutante and her parents on tax evasion.

JACINTO-HENARES: It's not a problem to be rich, and it's not a problem to flaunt it as long as the taxes are properly paid. So if you're rich and you flaunt it, just make sure you have been being the right taxes. Sooner or later, I will see it.

SMITH: If you watch Filipino TV, you would think that Kim is everywhere, that she knows everything, knows all the cheaters. But here's the secret - the number of these rich and famous people that Kim's gone after is shockingly small, just 230 cases.

KENNEY: And yet, it's enough to strike fear into the heart of even the little guy. Kim says in 2012, her office collected its largest amount in a single year, almost 15 percent more than the year before. And it's not just taxpayers who are afraid of Kim. It's the people who work for her, the tax collectors.

Kim says she's cracking down on corruption in her own department. And so far, she says, her mom tells her that it's working. Her mother recently told her that the cost of bribing a tax official in the Philippines has gone up by about 60 percent.

SMITH: So that's the tough-guy approach to tax enforcement. But what do you do if you are in a country where your tax collector does not carry a gun? What do you do when your tax collector sounds like this?

CHIARA PUZIOLLO: Redditometro.

SMITH: Next stop, Italy, where the tax collector is Chiara Puziollo (ph). And her secret weapon is called...

PUZIOLLO: Redditometro.

KENNEY: We'll explain exactly how it works in just a minute. But first you have to understand how bad tax collection problem is in Italy. This is a place where the former prime minister, Silvio Berlusconi, is being sentenced for tax fraud - tax fraud he committed while he was running the country.

SMITH: While he was running the country. Oh, Italy - perhaps you've heard of the fashion label Dolce & Gabbana. Well, both of them - both of those dudes, Domenico Dolce and Stefano Gabbana - were convicted of tax evasion. Even Giorgio Armani was caught not paying his taxes.

KENNEY: And yet, unlike the Philippines, all these arrests of these famous people - they don't seem to have helped the problem. I mean, people didn't seem scared. In fact, it kind of had the opposite effect, like, oh, well, those guys aren't paying their taxes.

SMITH: Dolce and Gabbana aren't paying - why am I going to pay?

SMITH: Why should I pay? Which brings us, of course, to the new Italian program.

PUZIOLLO: Redditometro - we have chosen not to translate it. It would be something like income meter or income measurer. But, you know, it's - if you agree, it's nice to keep the Italian word.

KENNEY: Redditometro.

PUZIOLLO: Perfetta. It's redditometro.

KENNEY: There's no tough tax agent with a gun in Italy. Instead, there's Chiara Puziollo. And this program, redditometro, is kind of sneaky and behind the scenes. The Italian government has basically declared that they're watching how Italians spend their money, literally keeping lists of what Italians buy.

SMITH: So they could look at some Italian businessman, Giovanni let's say - they can see what Giovanni declares is his income. And then they could check a list that they've put together of exactly what Giovanni has been spending his money on, his purchases. The government can see if Giovanni is spending more money than he says he makes. So they know what kind of house Giovanni has.

PUZIOLLO: Or a car - if you buy a car, of course you have to register the car in the public register for automotive. And we automatically gather the information.

SMITH: So if Giovanni has a Ferrari, he had better be reporting enough income to afford a Ferrari.

KENNEY: The tax office can also make private businesses rat you out. Some stores report to the government who exactly is buying what - not everything though. I ran a shopping list past Chiara.

If I went to the store and bought groceries, is it possible that your agency would know that I spent X amount on groceries?

PUZIOLLO: Absolutely not.

KENNEY: A bouquet of flowers?

PUZIOLLO: No.

KENNEY: A cup of espresso?

PUZIOLLO: No, no. Doesn't seem really interesting, the coffee and (unintelligible).

(LAUGHTER)

KENNEY: Right, right. OK. What about if I went and I bought a really fancy, new Prada handbag. Would you know about that?

PUZIOLLO: Big expenses might be traced by the revenue, yes - depending on the amount, yeah.

KENNEY: What is the amount?

PUZIOLLO: Those are expenses beyond the 3,600 euros.

KENNEY: About $5,000 U.S.

PUZIOLLO: Yeah.

KENNEY: So the tax department - they have all this data about the big purchases you made that year.

SMITH: About the diamond necklace or the super expensive Rolex.

KENNEY: Your expenses. And they match that up to what you say you earned that year, your declared income.

PUZIOLLO: When there is a big, big, big discrepancy between the two, well, you may be asked to come to the revenue just to explain what you is your source of income.

SMITH: She makes it sound so polite.

KENNEY: Yeah, she even said they send you an invitation letter to come down to their offices. So far, they've sent out about 20,000 of those letters.

SMITH: And just like in the Philippines, the power of this is that everybody knows about this new program. And in fact, we were looking at some of the news reports from Italy. And when this was announced, people went nuts. They were going - oh, no, I can't buy art now. And, you know, I spend all my money on art.

There was one woman who was complaining that she has three horses. She says I have three horses, and yet I've spent all of my money on these horses. So I'm not rich. I'm just a poor person with three horses. The government is going to assume that I'm rich.

KENNEY: And then there was this art gallery owner complaining that people would stop buying luxury goods because they would worry that the government was going to get tipped off to them, which, you know, if true, is not a good thing for a country coming out of a recession.

SMITH: But you know what else is not good for a country coming out of a recession? Nobody paying their taxes. That's the argument that Chiara makes. And Chiara says, hey, it's Italy. We've got to try something.

KENNEY: All right. So so far, we have two very different ways the tax man or woman gets into your head - the gun-toting sheriff, the sneaky bureaucrat, both scary in their own ways. But maybe there's an easier way.

SMITH: We're going to hear about that after this quick message.

(SOUNDBITE OF DANIEL HOLTER AND KYLE WHITE'S "CIRCULAR UPLIFT")

SMITH: All right. We've taken you from the Philippines to Italy. Next up, let's go to the U.K.

MICHAEL HALLSWORTH: In the past, it was generally thought that, you know, enforcement is the only thing that matters. But increasingly, people are thinking other things matter. You know, not just, am I going to get caught? - but is this the right thing to do?

KENNEY: This is Michael Hallsworth. And he was part of a special team of economists and policy folks put together by the U.K. government to do a bunch of stuff, including think about ways to get more U.K. residents to pay their taxes. This bunch of brainiacs who spent years studying social science and behavioral economics, it was called The Behavioral Insights Team.

SMITH: And compared to Italy or the Philippines - OK, we're going to admit it - the U.K. barely has a problem. They are some law-abiding folks there. But still, one of the principles of life is the tax man does not rest until he or she is at 100 percent enforcement. And that was basically what they brought to The Behavioral Insights Team. We want to make sure that everyone in the U.K. pays their taxes.

KENNEY: So the team had this list of 100,000 people who'd filed a tax return but hadn't paid up, the deadbeats - deadbeats with an address. So they decided to conduct this experiment on them. Is there a way to guilt people into paying their taxes without sending a cop to their door?

SMITH: And this is the dream of tax enforcement agents everywhere - that you can just send out a threatening letter and someone's going to send the money back. And it rarely, rarely works. So these guys wanted to figure out - how do you send out a letter that will convince people, that will get inside the tax cheat's head, that will make him or her feel bad, that will make someone do the right thing?

HALLSWORTH: If you look at behavioral economics, one of the important concepts that keeps coming up is social norms. So we're influenced by what other people do in the same situation.

KENNEY: And they started by figuring out what doesn't work - OK, we can't be bureaucratic; we can't be whiny or mean. Did you consider anything, like, more extreme, like - listen, idiots, it's your taxes. You have to pay them, you know. You don't have a choice.

HALLSWORTH: (Laughter) No, not really. Obviously, you know, it is actually a serious point - isn't there? - which is that tone is really important. We know that people pick up on this. If the tone is perhaps overly aggressive, people may actually react against that and say, well, no, I'm not going to do this. So we really wanted to come up with something which, you know, was a reasonable tone.

KENNEY: For two years, they tried different wording in the tax letter. Some simply said that most people pay their taxes. Others talked about the good things that taxes pay for - hospitals and schools. And in the end, the message that worked the best was this simple phrase, quote, "you are currently in the very small minority of people who have not paid us yet."

SMITH: I love that, the very small minority of people who have not paid us yet, which is probably how it makes you feel, right? Oh, very small. And it actually does fit into what we know in economics about fairness. Basically, if you think that nobody else is paying their taxes, you're not going to pay your taxes either. But if you think that everyone is - if you think that you're the small, or, in the wording of the letter, the very small minority, you will tend to go along with the crowd.

KENNEY: And this message, it worked. Michael says these people, more than any of the others, sent in the money they owed to the government. It was so successful that the U.K. is still using this messaging in letters being sent out to delinquent taxpayers right now.

SMITH: The economist James Alm that we spoke to at the beginning, the guy who said that tax cheats rarely get caught, he says when you use all of these kind of techniques that we've talked about today - when you use them, you're really making people redo their economic calculations. There may only really be a 1 percent or a 2 percent chance of getting audited, a 2 percent chance of getting caught. But he says what each of these tricks does is it makes you feel like the chance of getting caught, the chance of somebody seeing you is bigger.

ALM: You have to use lots of different approaches, lots of different tools, in part because there are so many different motivations for people in deciding whether to pay their taxes properly. Context matters. Institutions matter. Country matters. And so you can't simply take a one-size-fits-all approach and assume that it's always going to have the same effect in all settings.

KENNEY: And James Alm, for the record - he told us he pays all of his taxes, even that time when he won 50 bucks in an NCAA pool, he declared it. So what is it for you? Like, what motivates you personally to do things like declare your NCAA pool, which, as you yourself said, you know, they're not going to catch you on.

ALM: It's not because I am afraid of getting caught. And it's not because I'm getting especially good service from the IRS. I think it's because I think that's the right thing to do.

KENNEY: So the social norms are at work on you.

ALM: Yep, yep. I work hard to try to overcome those social norms. But obviously, I have not been successful.

KENNEY: (Laughter).

(SOUNDBITE OF CATIA SALVADORI AND STEPHANIE SIMMONS' "LONG DISTANCE LOVE")

KENNEY: As always, we want to know what you thought of today's show. You can email us - planetmoney@npr.org.

SMITH: You can also find us on Twitter or Facebook. Today's rebroadcasts was produced by Daniela Vidal.

And if you're looking for something else to listen to, you need to check out NPR's brand new podcast. It's called Up First. It's the biggest stories and ideas from politics to pop culture. And here's the key - they give it to you in just 10 minutes, and it gets published at 6 in the morning. This can be a regular part of your morning. Just catch up on everything that's happened in the last 24 hours, and you're good to go. It's called Up First. You can find it wherever you get your podcasts. I'm Robert Smith.

KENNEY: I'm Caitlin Kenney. Thanks for listening.

(SOUNDBITE OF CATIA SALVADORI AND STEPHANIE SIMMONS' "LONG DISTANCE LOVE")

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