From Letters of Marque:
Based on a discussion of illegal income in Income Tax today, I have a question.
Caveat: we haven’t really talked about deductions, so the obvious answer to my question may not be so obvious.
Suppose that I start work, after a long period of unemployment, in the final third of the year. I get paid $30,000 a year, so that year I would have income of $10,000. It turns out that I also embezzle $10,000 from my hapless employer, leaving me with $20,000 of income in 2005. I declare it all.
Come January 2006, I pay back my $10,000 of stolen goods. I work all year, making $30,000, with a deduction of $10,000 for the amount that I stole. I declare all of this, and have $20,000 of income in 2005.
I pay $1,765 in federal income taxes each year, or $3530 both years. Had I not embezzled, I would have paid $415 + $3265 = $3680 in taxes. In other words, aside from any general harm associated with my embezzling, like jail sentences, I’ve walked off with a cool $150.
Isn’t this somewhat perverse?
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