Redirecting one’s own taxes as an effective altruism method

post by David Gross (David_Gross) · 2023-11-13T15:17:12.637Z · LW · GW · 34 comments

Contents

  Theory
  Practice
    Refusing to pay taxes you owe
      Above-board refusal methods
      Sneaky refusal methods
    Not owing in the first place
      What about the tax deduction for charitable contributions?
  Objections anticipated
    It’s not ethical
    It’s not safe
    It’s not effective
      You’ll just end up paying more in the end
      Pay or don’t pay, the effect on government actions is the same
      It’s not worth the fuss; there are better ways
  Conclusion and summary
None
34 comments

About twenty years ago, I stopped paying U.S. federal income taxes. By law, the government has ten years to collect an unpaid tax bill, whereafter a sort of statute of limitations kicks in and the bill becomes permanently noncollectable. I’ve adopted the practice of waiting out this ten-year period and then donating the amount of the uncollected tax to charity, typically the Top Charities Fund organized by GiveWell.^[1] Over the past six years I’ve redirected over $30,000 from the U.S. Treasury to charity in this way.

In this post I’ll briefly outline the theory and practice of this sort of tax redirection, and address some likely objections. If you have questions about the nitty-gritty details, leave them in the comments or drop me a line by email.

Theory

From an effective altruism perspective, the theory behind tax redirection is that giving money to the government is far from the best way you could deploy that money. It is questionable whether funding the government is even a net positive: worse than merely wasteful and inefficient, the government is often harmful. But even if you believe that marginal funding of the government is more good than bad, it is almost certainly not among the best ways you could allocate your money.

So if you could avoid paying federal taxes and give that money instead to more well-chosen causes, in a frictionless way, it would seem wise to do so (from an effective altruism standpoint). But of course such a move is not frictionless: the government disincentivizes some varieties of tax redirection with threats of sanctions, and other varieties of tax redirection have their own costs.

So you have to factor in those costs before you can decide if tax redirection would be a good option for you. But to many people, tax redirection is in the “unthinkable” category, and so they dismiss the option before actually weighing the costs and benefits. If you have been among these people, I hope this post will encourage you to move tax redirection from “unthinkable” to “let me think about that for a moment.”

The theory and practice of tax redirection in the U.S. has been developed largely by pacifist “war tax resisters”, who redirect their federal taxes because of conscientious objection to funding war.^[2] Their belief that funding the government is indeed immoral led them to desperately seek alternatives. But those alternatives, having been developed and deployed to varying degrees of success, are worth considering even by those whose values do not include pacifist scruples: for those who merely consider government funding to be suboptimal.

Practice

There are two main families of tax refusal strategies, each of which has numerous variants:^[3] In the first family, practitioners owe taxes to the government but neglect to pay them. In the second, practitioners organize their affairs in such a way that they do not owe the taxes to begin with.

I don’t intend to explain these strategies in detail here, but I’ll give a bird’s-eye view of the strategy landscape. This is based on how tax redirection is practiced in the modern U.S., where the national government mainly relies on income-based taxation (rather than, say, a value-added tax or customs duties). Other countries (and historical periods) have their own sets of strategies.

Refusing to pay taxes you owe

There are a few ways to refuse to pay an income-based tax. One is to arrange one’s affairs such that one is personally responsible for paying the tax (so it isn’t automatically taken from one’s paycheck), and then to simply not write the check when the bill comes due. Another is to earn one’s income in such a way that the income does not come to the attention of the government (e.g. in the “underground economy”). Another is to dishonestly report income, deductions, and tax credit qualifications in such a way that it erases any tax that you owe.

The first set I’ll call the “above-board” methods; the latter two the “sneaky” methods.

Above-board refusal methods

One common way to avoid tax withholding is to become self-employed. In the U.S., self-employed people are responsible for doing their own tax withholding and payment, and so also have the power to stop such withholding and payment should they choose to do so.

Another possibility, for those fortunate enough to have the option, is to live off capital gains rather than earned income.

Salaried or wage-earning employees typically are more limited in the extent to which they can stop or reduce withholding from their paychecks. An employee can file a new W4 form with their employer in order to eliminate income tax withholding (but not payroll tax withholding a.k.a. FICA). But a few years down the road when the government gets wise to what’s going on, they are likely to demand that the employer disregard the W4 and resume withholding taxes. So this is only a temporarily successful method.

People who resist in this manner file ordinarily honest and accurate tax returns that show a large tax due (the tax that was not withheld over the course of the year). Then they file their returns, but without submitting this payment.

The I.R.S. (the tax-collecting body in the U.S.) responds with a series of notices to the taxpayer with increasing use of boldface type and exclamation marks as the months pass. They also add penalties and interest to the delinquent amount. At the time of this writing I believe the annual interest rate in effect is 8% (which is as high as I’ve seen it); it rises and falls periodically to stay a bit above the inflation rate. Penalties accrue at a rate of 0.5% of the delinquent amount each month until they reach a maximum of 25% of that amount.

To give you some idea of the effect of penalties and interest, by the time my tax delinquencies have reached the ten-year statute of limitations they have typically grown to be a little less than double the size of the original tax debt (in nominal, not inflation-adjusted dollars).

The I.R.S. may eventually attempt to seize this money. While they have considerable authority to do this, for various reasons they are not very good at it, and they often leave money on the table (as in my case, in which the statute of limitations has tolled on multiple tax years even though the I.R.S. has, as far as I can tell, enough information to go on that it could seize assets from me if it got down to it). They seem prone to throw in the towel after attempting to go after a few low-hanging-fruit asset categories:

• Bank or (non-retirement) brokerage accounts for which they have already received a 1099 form (in the U.S., this form covers the mandatory tax reporting of interest, dividends, and similar payments by the issuer).
• Salary income which they can levy (partially) via your employer.
• Tax refunds or other direct payments from the federal government itself. (They may, for example, keep 15% of your Social Security check and apply it toward your taxes.) The I.R.S. tends to drop the ball here, too, surprisingly. For example, all of my Covid-era “stimulus” checks arrived at my door intact although I had tens of thousands of dollars of delinquent taxes at that time.
• After a good long while, if you owe enough, they may place a lien on any real estate or other large-scale property you might own or have an interest in (property whose transfer must be mediated by government). This would mean they could collect money from the proceeds of the sale of such property were you to try to sell it while the lien is in effect.

So part of the friction of these tax refusal methods is that they work best if you take care to avoid having easily-seizable assets of this sort.

If you can put up with I.R.S. junk mail and avoid income/asset seizure for ten years, the statute of limitations kicks in and you are off the hook for the delinquent taxes, as well as the accumulated interest and penalties.

There is a law on the books that makes willful failure to pay taxes a criminal offense. However it is almost unheard of for the U.S. government to criminally prosecute someone who files an honest and correct tax return but who will not voluntarily surrender the money. The government instead relies on the above-mentioned civil penalties and seizures, and ordinary debt collection tactics like pleading letters, as its incentives in such cases.

Sneaky refusal methods

Sneaky tax refusal methods are pretty much the same as the many varieties of commonplace tax evasion: not filing returns, not declaring income, claiming deductions & credits you do not actually qualify for, and so forth.

The advantage of these methods is that if you don’t get caught, you don’t have to worry about penalties & interest or about seizures.

Among the disadvantages are that if you are caught, the penalties are more severe (and are much more likely to include criminal penalties), and that the ten-year statute of limitations does not apply: so the tax, interest, and penalties are your permanent sword of Damocles.

However, the government only discovers a fraction of such cases, and only has the resources to pursue some of those it discovers. Those who practice these methods of refusal are relying in part on playing the odds, in part on matching their wits against those in the tax bureaucracy.

Not owing in the first place

The second family of refusal methods involves not owing the tax in the first place.

If you’re loaded, for example, maybe you can get by fine without earning further income, and so income taxes will be among the worries of life your good fortune keeps at bay.

For those of us of more modest means, there are other ways to legally eliminate certain taxes on income and reduce others.

On the upper-end of “modest”, there are the variety of legal or barely-legal tax-dodging strategies that are favored by the well-to-do and that are almost our national sport. Many are more trouble than they’re worth to the more typical taxpayer—unless that taxpayer is unusually motivated to lower their tax bill (if, for example, there is an ethical multiplier to the more pedestrian financial cost/benefit analysis). If you are willing to put in the effort and to read the fine print, and if you place a value on reducing your taxes that goes beyond the value of thereby increasing the income you can retain, it may be worthwhile to discuss with a tax expert the various ways you can cleverly reorganize your affairs to convert taxable income into untaxable wealth.

In the mid-range of “modest” are the many varieties of tax incentives that are available to the typical taxpayer but that many of us fail to take advantage of for various reasons: things like Health Savings Accounts, tax-deferred retirement accounts and the retirement savings credit, and so forth. If you become convinced that there is value in keeping your money out of Uncle Sam’s pocket, that value may be enough to motivate you to learn more about how you can qualify for such credits and deductions.

Finally, there is the more radical solution of voluntary simplicity: Learning how to live large on an income that is below the threshold at which income tax applies. This is one of the methods I practice, and I have not owed any substantial amount of federal income tax since 2003,^[4] even while living what seems to me to be an objectively rich (if not in the sense of “wealthy”) life in pricey coastal California. If you haven’t heard the philosophers and prophets shouting this from the rooftops yet, let me be the first to tell you: some of the most valuable things in life aren’t purchasable. People in their pursuit of money and consumer goods can unwisely neglect things that they would, on reflection, value much more highly than what they’ve traded them for. A life of voluntary simplicity can be a much less expensive one, but if it’s a poorer one you’re doing it wrong.

In cases like these, “redirection” is less cut-and-dried. If you reduce or eliminate your tax, what is there to redirect? In my case, the redirection was in part a redirection of time. Before I reduced my income below the tax line I was working a full-time job. Now, in order to earn less income, I also work much less. This has allowed me the time to volunteer for charitable organizations such that I now put in twice as many volunteer hours as paid hours per year.

What about the tax deduction for charitable contributions?

Perhaps you are thinking: “Wouldn’t the best way to redirect taxes legally be to earn all the money you can, give away a ton of it to good causes, and then take a tax deduction for charitable contributions to eliminate your taxes?”

Unfortunately, in the U.S. it is not typically practical to zero-out the income taxes you owe by means of the tax deduction for charitable contributions. This is for a few reasons. For one, the deduction for charitable contributions is limited to a percentage of your adjusted gross income (lately, 60% or less, depending on the type of charity). But also, this deduction is an itemized deduction. You can only take itemized deductions if you forego your standard deduction. This means that you do not begin to reduce your taxes at all until your itemized deductions exceed your standard deduction. (If your itemized deductions are already high for some other reason, this may be less of a problem for you.)

If you’re earning-to-give in the highest income tax bracket, you should be aware that even if you get the highest allowable charitable contributions deduction, you’re still earning-to-give about 18¢ of each dollar to be spent by the ethical nincompoops in Congress rather than your charity of choice.

Objections anticipated

Objections to tax refusal and redirection can typically be categorized as:

1. It’s not ethical.
2. It’s not safe.
3. It’s not effective.

I don’t find these objections very convincing (if I did, I’d be convinced by them and stop), but here is a sketch of some of them. If there are any others that you find particularly show-stopping, please make note of them in the comments.

It’s not ethical

Sometimes the not-ethical critique is leveled at particular varieties of tax refusal and redirection, such as those that involve filing dishonest tax returns. Such critiques are not criticism of tax resistance as such, but of dishonesty, and so addressing them is a little out-of-scope here. Since they apply only to a subset of tax refusal techniques, I’m inclined to just concede the point and consider the other techniques instead.

But this variety of critique can also be directed at tax refusal in general. As such, it usually takes a form something like this:

Government and the rule of law is a mixed blessing, but it is indeed a blessing and beats the alternative. It’s also fragile and depends on the consent of the governed. The consent of the governed is in part a kind of mutual bargain: I consent to be subject to government because I see that my fellow-citizens are similarly subject. What I lose from being under the thumb of The Man, I gain from being protected by that same stately digit. But if people notice too many free riders who get the benefits of government without suffering the drawbacks, the consensus that allows government and the rule of law to operate is in danger of unraveling. Tax refusers are free riders of this sort and as such are a menace to domestic tranquility.

I can see the intuitive appeal of this sort of critique, but to me it seems too much like a political philosophy just-so story. It strikes me as the kind of excuse you might come up with if you began with the conclusion that tax refusal was a bad idea and you wanted to work backwards into a plausible story of why that was the case. I don’t have a knock-down argument for why this critique is incorrect; I just find it too speculative and abstract to outweigh the more concrete, dollars-and-cents case in favor of tax redirection. For example: Why exactly should I expect the rule of law to collapse (rather than for the government to be reformed or replaced) when the consent of the governed wavers: could the results not just as plausibly be positive ones? And just how much weight am I supposed to assign a quiet tax redirection, on the scale of threats to government legitimacy, compared to, say, commonplace contemporary political rhetoric?

I’m also less convinced of the baseline benignity of government and the rule of law than most, so this sort of argument has a harder time getting traction with me. Your mileage may vary.

Some people also consider taxes to be ethically equivalent to a voluntarily-contracted debt, such that it would be underhanded and unethical to refuse to pay in the same way that it would be to skip out of a restaurant before your bill arrives at the table. Such people invert the libertarian slogan “taxation is theft” to “tax avoidance is theft”. If such an argument resonates with you, that might also be sufficient reason not to consider (at least some forms of) tax redirection.

It’s not safe

Suggestions of tax redirection are often countered by insistence that it’s foolhardy: If you don’t pay your taxes, the I.R.S. will seize your home and your car and take you to court for all you’ve got and throw you behind bars. (This of course only applies to the owe-but-don’t-pay methods; if you don’t owe to begin with, I.R.S. enforcement is a non-issue for you.)

Admittedly, there have been times and places where it has indeed been dangerous to neglect to cough up the demanded tribute, but the United States in the 21st century is not one of them.

For example, the threat of jail time for failure to pay taxes is in the being-struck-by-lightning or shark-attack category of rarity. In 2022, 8,143,000 federal tax returns were filed in which the filers failed to pay what the returns said they owed. There were also at least 413,000 taxpayers who failed to file returns (only counting the ones the I.R.S. knows about).^[5] That same year, the I.R.S. successfully prosecuted 699 people for tax crimes of all sorts.^[6] Even if every one of those prosecutions had been of people who merely refused to pay (or to file and pay), that would mean that an individual tax scofflaw would have had something like a 1 in 12,000 chance of being brought up on charges.

Property seizures are also vanishingly rare these days. Between 2012 and 2021 the agency averaged about 350 such seizures each year. That includes all tax enforcement activity: as a tax redirector waiting to have your property seized, you’d be in a long line somewhere behind Colombian drug lords and Russian oligarchs.

The risk of salary levies and bank account seizures is higher, however, and definitely rises to the level of a real risk that a non-payer (at least one who practices one of the owes-but-doesn’t-pay methods) is likely to face. If you are unlucky enough to have an account or salary levied upon, you face an abrupt financial loss that could be difficult to navigate if you haven’t prepared for it, as well as potential embarrassment (e.g. if your employer wonders what’s going on) and inconvenience (your bank account may be frozen for a month while all the paperwork goes through, outstanding checks might therefore bounce).

If your tax delinquency rises high enough ($62,000 as of this writing), the government may refuse to issue or renew your passport: another legitimate risk, but one with a straightforward mitigation strategy (keep your redirection below that threshold).

There are more- and less-safe ways to redirect, and for most of the risks there are known strategies to mitigate them. Again, the U.S. war tax resistance movement has a wealth of institutional experience with this sort of thing, and you should definitely consult their instructional material if you are interested in redirecting federal taxes in a way that most prudently meets your goals and your risk tolerance.

They also have developed a mutual-aid method of mitigating risk: the War Tax Resisters’ Penalty Fund. It works this way: if a war tax resister has money seized by the government to pay delinquent taxes, they can apply to the fund for 100% reimbursement of any penalties & interest that were part of the seized amount. (The money is raised by passing the hat among other war tax resisters and sympathizers.) That way the resister themself does not lose any more money than they would have if they had just paid the taxes initially. This fund is only available to resisters who resist from an anti-war motive, but there is nothing stopping a group of otherwise-motivated resisters from starting a similar mutual-aid insurance pact.

The last time a war tax resister applied to that fund (as of this writing) was in September, 2019, which is one measure of how infrequently the I.R.S. has been seizing money from stubbornly determined tax refusers lately.

One caveat about my mostly-reassuring story about the risks of tax redirection is that it leans heavily on what the actual policy of the I.R.S. over the last few decades has been. Things could be much different, and that’s only a policy change away. The I.R.S. could become better-funded and less bureaucratically catatonic, or the government could decide to become more aggressive in going after resisters. If you’re waiting ten years for the statute of limitations to toll, or if you’re playing the odds based on precedent of lax investigation of iffy tax strategies, that could be a problem. Past performance is no guarantee of future results, as the standard disclaimer says.

It’s not effective

Finally there is the criticism that tax redirection is not effective, or not sufficiently effective. This might take one of these forms, for example:

1. Though you might get away with it, you may also fail, in which case you will be on the hook for interest and penalties and thereby end up worse off than if you had just paid up in the first place.
2. Even if you consider funding the government to be a net negative, at the margin where your personal taxes apply to government spending the effect is negligible. What the government fails to get from you, it’ll get some other way, and its spending isn’t meaningfully influenced by its revenue anyway.
3. Even if we grant that it would be ethically better to fund (say) a GiveWell-endorsed charity than the U.S. Treasury, and even if we grant that it can be reasonably safe to do so, the amount of fuss you have to go through to do this well is great enough that you would be better off devoting that effort to something else. For instance if you just put that effort into earning more money, even after the government took its cut you could do more good than you would by painstakingly defying taxation.

You’ll just end up paying more in the end

For the first of these criticisms, here are some figures that may help you evaluate it. The U.S. Government Accountability Office does a periodic audit that includes data on I.R.S. collection efforts. The latest one I found^[7] gives the following figures:

• There were about $612 billion in outstanding, overdue tax assessments at that time.
• $201 billion of these were categorized as “currently uncollectable” (“include[s] taxpayers who agree they owe the tax but are unlikely to pay and businesses with extreme financial hardships”).
• Another $77 billion were “write-offs” (tax debt that is hopelessly noncollectable because the taxpayer is bankrupt, insolvent, dead, vanished into thin air, or something of that sort).
• Another $88 billion is something called “compliance assessments”—when the IRS tells a taxpayer who hasn’t filed a return (or a fully-revealing one) what the agency suspects the taxpayer would have owed if they had filed accurately, but the taxpayer isn’t going along with it and the controversy is still in limbo. The agency doesn’t have much confidence in collecting this money either.
• That leaves $246 billion in “delinquent unpaid assessments” for which the agency has some hope of recovering the money through its enforcement efforts. But even for this segment, the GAO gives a figure of only “21.9% collectability”: roughly $54 billion.

So while in any particular individual case, there is indeed a chance that the resister will end up paying more in the end because they got unlucky, in the aggregate, the government only collects a small fraction of what people do not voluntarily pay.

Of course a rough calculation like this can only give you an estimate of your actual risks. You are not an average taxpayer, but a unique one. You likely do not have plans that include joining the bankrupt, insolvent, dead, or missing “write-offs” category, for example. On the other hand, if you are considering redirection in a deliberate way, you can also plan ahead in ways that ordinary delinquent taxpayers typically do not, and so you can reduce your odds of being collected upon.

Pay or don’t pay, the effect on government actions is the same

This second criticism is most relevant to those whose calculus of redirection includes a term for not wanting to contribute to what they see as a net harm (or perhaps absolute immorality) of the results of government spending.

For the purposes of the argument on this page, it is less relevant. Whether your favorite effectively altruistic charitable use of your money is vastly superior to the harm that the government would do with the money, or whether it’s vastly superior to the mostly-symbolic act of burning that money on a pyre constructed out of a 1040 form, it’s still the better choice.

At most, this criticism (if valid) likely just means a modest adjustment of your cost/benefit calculation.

It’s not worth the fuss; there are better ways

This last criticism seems plausible to me, but I really would want to see the math (and the follow-through).

I suppose for each plausible method of tax redirection you could come up with an estimate for how much good your redirection would do and how much exertion it would take to do it successfully, then estimate how much good you might do with that much exertion applied in some other reasonably optimal way, and see how they compare. Seems like a difficult task with mighty error bars, but potentially doable. For my part, my eyes glaze over when I try to ponder all of the variables and how I might estimate their values.

I admire anyone who can come up with such a calculation that approaches rigor and completeness. Myself, I eyeballed it and went with my gut. In my case, some of the most substantial positive side effects of tax refusal I have experienced were ones I did not anticipate before I began, and I’m pretty sure I overestimated the likelihood and severity of the negative ones at the outset. But I wouldn’t want to suggest that my n=1 experience with this should be considered typical: my life situation, personality, aspirations, resources, and so forth all contributed to how things have gone for me, and everyone gets dealt their own set of cards there.

Conclusion and summary

Tax redirection is a promising addition to the arsenal of techniques effective altruists can use to better deploy their resources in ways that further their values. There are a variety of ways one can go about it, depending on one’s values, goals, and risk-tolerance. The U.S. war tax resistance movement has a good understanding of these various methods as they are practiced in the U.S., their pros and cons, and strategies for doing them most effectively. Tax redirection is probably not for everyone, but ought to be considered more carefully and more seriously than is currently common among those interested in pursuing effective altruism.

1. ^{^}

   GiveWell, by the way, does not endorse my action and in fact (since this post was originally posted) has explicitly disavowed it and asked me to stop redirecting my taxes through their fund. In their email to me explaining this, they wrote: “We saw your post on the LessWrong forum regarding the provenance of your GiveWell donations and have since thought carefully about what the right gift acceptance policy is for GiveWell. Going forward, we are implementing a policy that we will not accept donations that we have reason to believe come from an illegal activity. As a result, we would prefer that you not direct those donations to GiveWell, and we plan not to deposit any future checks that we believe come from withheld taxes.”

2. ^{^}

   This is an oversimplification. Not all war tax resisters are pacifists, and not all resist from motives of conscientious objection. For more information on war tax resisters in the U.S. and their methods, see the website of the National War Tax Resistance Coordinating Committee.

3. ^{^}

   In the U.S. war tax resistance community, it’s commonly observed that there are about as many tax resistance techniques as there are resisters.

4. ^{^}

   The unpaid taxes the I.R.S. periodically sends me pleading letters about are unpaid self-employment taxes, which are distinct from the federal income tax—they’re also a tax on income, but more akin to the FICA/payroll-tax that salaried employees pay.

5. ^{^}

   https://www.irs.gov/statistics/soi-tax-stats-delinquent-collection-activities-irs-data-book-table-25

6. ^{^}

   https://www.irs.gov/pub/irs-pdf/p3583.pdf (page 5: “Tax Crimes”)

7. ^{^}

   https://www.gao.gov/assets/gao-23-105564.pdf

34 comments

Comments sorted by top scores.