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Taxing Pimps and Prostitutes?

2 min readBy: Gerald Prante

As with any taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. system, compliance is always an issue for the revenue department. Compliance is made even more difficult when individuals are engaging in illegal activities. Because our federal tax system is based primarily on taxing income, the tax enforcers can become involved in the hunt for the initial illegal activity that earned the income. As the article below points out, that’s how the Feds nabbed Al Capone. And that is how one U.S. Senator wants to now round up all the pimps. From the Atlanta Journal-Constitution:

Pimps and sex traffickers could soon find themselves being chased by tax collectors, not just the vice squad.

Sen. Charles Grassley, chairman of the tax-writing Senate Finance Committee, wants the Internal Revenue Service to chase after pimps and sex traffickers with the same fervor it stalked gangster Al Capone for tax evasion.

Grassley (R-Iowa) would hit pimps with fines and lengthy prison sentences for failing to file employment forms and withhold taxes for the women and girls under their command.

The proposal would make certain tax crimes a felony when the money comes from a criminal activity. A one-year prison sentence and $25,000 fine would become a 10-year sentence and $50,000 fine for each employment form that a pimp or sex trafficker fails to file.

Grassley planned to propose the penalties when his panel meets today. (Full Story)

Grassley appears mainly interested in preventing the illegal activity from occurring in the first place and using the tax code as an avenue for that prosecution rather than obtaining the revenue that escapes the treasury as a result of the unreported source of income. Some tax reformers, however, want to try and use the tax code to elicit more revenue out of these sources, which would have a side effect of creating negative distortions in the industry and lowering their “output.”

Along the same lines, some of those involved in black market activity actually welcome taxation if the government was to permit the activity. This is because they believe it would create a revenue windfall for politicians that are always hungry for more money to spend. The theory is that once the activity was legalized, the politicians would become addicted to the revenue source, and the costs of ever going back to prohibition would be too great.

Other tax reformers that often take on the issue of black market activity are those in favor of a national retail sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. . These reformers claim that they would be able to make black market participants like drug dealers and pimps pay more taxes since they use their money often times to purchase goods in the legal market, while under the current income tax system, much of that income is untaxed. However, while it could possibly allow for a fairer treatment of the tax burden on one hand, one problem is that a high national retail sales tax would likely create more black markets if the tax were to be significantly high.