Wealthy Americans are concealing large amounts of income from the I.R.S. There is a very easy way to fix that.
When During World War II, the federal government started withholding income taxes from workers’ paychecks. The withholding system remains the cornerstone of income taxation, effectively preventing Americans from lying about wage income. Employers submit an annual W-2 report on the wages paid to each worker, making it hard to fudge the numbers.
But the burden of taxation is increasingly warped because the government has no comparable system for verifying income from businesses, including small business of only one person. The result is that most wage earners pay their fair share while many others engage in blatant fraud at public expense.
The Internal Revenue Service estimated that Americans report less than half of all income that is not subject to some form of third-party verification like a W-2. Billions of dollars in business profits, rent and royalties are hidden from the government each year. By contrast, more than 95 percent of wage income is reported.
This unreported income likely amounts to more than $600 billion this year of lost revenue that wage earners are forced to cover. The government has an obligation to enforce the law and to crack down on this epidemic of tax fraud. One pragmatic solution would be to require banks to produce an annual account statement totaling inflows and outflows, much like the 1099 tax forms that most of us receive each year. Another would be to crack down on off-shore banks that hide trillions of unreported income. These solutions would be implemented only for people above a certain income, but also ensure that small business pay their taxes too. The proposal would not increase the amount anyone owes in taxes. It would, instead, increase the amount paid in taxes by those who are currently cheating. If this were implemented it is likely that it would scare people into doing what they should have done anyway.
One thing that needs to happen to take full advantage of the “new” corporate 1099s is to make a significant investment in upgrading the I.R.S.’s outdated computer systems, and in hiring enough qualified workers hold accountable those who cheat.
Congressional Republicans, unable to get public support for reductions in federal spending, have pursued that goal indirectly by constraining federal revenue, by hacking away at the I.R.S.’s budget. As usual, that Republican idea seems counterproductive. The share of all tax returns subject to an audit declined by 46 percent from 2010 to 2018, according to the CBO. For millionaires, the decline in the audit rate was 61 percent. Today, the government employs fewer people to track down deadbeats than at any time since the 1950s.
If these changes were implemented it would allow the agency to collect up to $1.4 trillion in lawful tax revenue that otherwise would go uncollected. This solution seems like a very logical way to crack down on crime, improve the equity of taxation, and in the process to raise the needed money for such things as infrastructure improvements and education.
We don’t need new taxes, let’s just start collection what people already owe.