... catching tax evasion and crafting homemade cocktails
Max Risch didn’t grow up dreaming of catching tax evaders. Supply and demand curves bored him in college. Still, he became an economist, but surely not to focus on tax policy, he thought.
Yet, here he is, assistant professor at Carnegie Mellon University’ s Te pp er School of Business and a recent co-author ofresearch that inspired a news frenzy about how really rich people — the top 1% — avoid paying as much as a fifth of their taxes. His recommendation, in part, is to give more money to the IRS. He can tell you all about it over a $16 cocktail. This interview has been edited for space and clarity.
Can you give a little background on how you got into tax policy?
I study a branch of economics called public finance. I sort of realized that how important taxes are for thinking about governments and how taxes are really a manifestation of a government’s priorities — how government wants to organize society.
What’s a tangible example of what taxes tell us about the government’s priorities?
So, the fact that we even have higher tax rates for higherincome earners is a reflection of the government’s priorities. It’s saying that we would rather raise money from high-income people and use it to spend more broadly and maybe more specifically on low income people. This is a reflection of values. And one value that it might reflect is that some people at the top of the income distribution might have been there by luck or by some path dependence. Some people at the bottom of the income distribution, similarly, might have been there by luck or by path dependence. So this money could be better used being redistributed.
Tell me about your research on tax evasion.
Basically, what it shows is that more tax evasion is done by those at the top of the income distribution than we might have previously thought. And this has implications for thinking about income inequality and for tax policy.
So how do they get away with it?
These schemes aren’t necessarily that complex. It’s holding income and assets offshore. The best enforcement tool that the government has to understand tax liabilities and income tax requirements is through third-party information reporting. And this is sort of a complicated word for your W-2. That’s the company you work for sending a report to you and to the IRS about how much you earned. That makes it very difficult for you to lie to the IRS about how much you earned. Until recently, there was no such report generated by banks in foreign countries about U.S. taxpayers’ income.
The second form that we focus on is pass-through businesses. And these are businesses that are privately owned partnerships and S corporations .( They are not taxed at the corporate level but rather at the personal income level.) We’ve found that the statistics generally missed large portions of potential noncompliance at the business level and focused only on noncompliance at the individual level, even though this business income is part of personal income for tax purposes.
Are you able to estimate a range of how much money is not being paid to the government that should be?
Yeah. We estimate that the tax gap, sort of in current dollar figures for the top 1%, is about $175 billion in the year.
If you could pick one
person and truly change their mind about something who and what would that be?
All right, I have one that I’m going to go out of the box [for], but it is one that is very important. I will go to the president of Brazil and talk about the realities of COVID19 and its effects on the Brazilian citizens. Clearly, the president of Brazil, you would think, knows about the research and about the real effects of COVID, on the population. But, you know, we’ve gone through an administration where we’ve seen the effects of sort of COVID denialism. They’re going on currently and very vehemently in Brazil, and it’s devastating. It’s now the country with, I think, the highest death rates, the highest contraction rates. And it really seems to be stemming a lot from rhetoric at the very top.
What do you do outside of work?
I have a 15-month-old kid. My life is really trying to navigate baby and COVID. Also, I just moved to
Pittsburgh in the fall and we moved three times in the last year. It’s been a lot of moving, and baby and COVID. And teaching and research. But not really much else.
Have you developed any annoying habits during the pandemic.
I’ve sort of gotten very into making cocktails. Since we just moved, our house isn’t very furnished, but we have a very big liquor cabinet. The only annoying part is now I’m expected to come up with a new cocktail every night.
Do you name them?
I do.
I hope they’re really dorky and tax-related.
No, they’re not.
One is the Montreal. It’s a play on the Manhattan with a little bit of orange twist. One is the Funky Brit, which is a play on a margarita but with London dry gin. I have one that’s the $16 cocktail, which just has a lot of expensive ingredients in it and I just tell everyone, “You know you’d be paying at least $16 for this.”