Those Cheating On Their Taxes

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to take full advantage of the “new” corporate 1099s is to make a significant investment in upgrading the I.R.S.’s outdated computer systems, and in hiring enough qualified workers hold accountable those who cheat.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.

2 comments

  1. If we Increase the number of IRS workers it could easily more than pay for itself. That goal should be built into the hiring process. Unfortunately we have passed the point of no return on the national debt. No amount of spending cuts or tax raises will be able to keep up. The consensus among economic types seems to be significant inflation will be used to address the debt. It’s what happened after WWII. At that time almost all the debt was owed to Americans and the average maturity of the debt was about 9 yrs. Now we will get to share about 1/3 of our debt devaluation with foreign countries. Unfortunately the avg. maturity is less than 9yrs now. I would look forward to about 10yrs of inflation to exceed a total of 100%. Following that tax revenue will be much higher due to increased wages and inflated asset values. We had such a period starting in 1973. Retirees with a time horizon of at least 20 yrs. should be the most concerned. If a majority of our income/savings is tied to non-inflation indexed products we will see a significant decline in spending power.

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  2. Hi Fred, thanks for your thoughts. I kinda think it doesn’t necessarily mean more federal employees but instead better tools and training. I have heard that the typical technology for IRS employees is Window 7 software and hardware, whereas the typical taxpayer who cheats it is cutting edge with AI. Even moving beyond the IRS, I think we could do much better with fewer employees who were better trained and had better tools.

    As far as the debt goes I look back to the reunification of Germany. When that happened West Germany was structurally sound, but East Germany was in shambles. With a massive infrastructure effort within five years East Germany was brought up to West German standards. That was a HUGE effort that took an enormous amount of money, and it paid off exceptionally well. I see us in pretty much the same boat. Compared to the rest of the world we are now the “East Germany” of infrastructure. If done properly it doesn’t have to mean gloom and doom.

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