It’s a sad commentary on contemporary American politics that there’s something controversial about taking actions to ensure people and corporations actually pay the taxes they legally owe, but that’s apparently where we are in this country.
As part of the financing for the much-negotiated bipartisan infrastructure bill, Democrats had proposed boosting the budget of the Internal Revenue Service, the better to allow the federal government’s principal tax-collection agency to increase its audits and otherwise beef up its technological capacity to detect tax evasion.
However, that led to significant opposition from Republican senators and so was dropped from the package. That’s a shame. Agreeing on the levying of new taxes is always a matter fraught with controversy, but insisting that people should pay what they owe under existing law shouldn’t be a matter of partisan disagreement.
Make no mistake, this is not peanuts we are talking about, but hundreds of billions of dollars annually. Credible estimates put the figure in the neighborhood of $600 billion to $630 billion for 2020, or about 15 percent of total taxes owed. In a 2019 paper, then-University of Pennsylvania law school professor Natasha Sarin, now a deputy assistant secretary at Treasury, and former Treasury secretary Lawrence Summers, now a professor at Harvard’s Kennedy School, estimated that some $7.5 trillion in owed taxes will not be paid between 2019 and 2029. Lest that seem high, the Treasury Department itself projects that the 10-year tax gap will grow to $7 trillion.
No one believes it’s possible to collect all, or even most, of that owed-but-unpaid amount. Not with the myriad ways available to corporations and the very wealthy to evade their tax obligations.
But if the federal government could collect just the 15 percent of that gap that Sarin and Summers believe it is possible to capture, it could give the federal government another $1.1 trillion — and at a time of yawning deficits.
According to a primer on the tax gap by the Committee for a Responsible Federal Budget, the bipartisan fiscal-policy organization, “By far the biggest contributor to tax gap is underreporting, or when an individual or business files a tax return that incorrectly underreports the taxes it owes in a given year.” For a sense of where that occurs, the nonprofit group notes that “overall, approximately 71 percent of the gross tax gap comes from the individual income tax, 18 percent comes from payroll taxes, and nearly 11 percent comes from the corporate income tax and other taxes.”
Why the growing chasm between what is owed and what is paid? One reason is that the IRS has long been under political siege. Its budget was reduced by 20 percent over the last decade, before Congress bumped up its funding marginally for Fiscal 2021 and then gave the agency added money to implement the various COVID relief plans. Still, the long budget squeeze led to about a 15 percent reduction in the agency’s workforce and a steep decline in the number of audits performed. Whereas the IRS audited more than 40,000 returns in 2012, it did only 11,330 audits in 2020.
That the US tax code is byzantine doesn’t help matters, but it’s also the case that when people try to game the system, they often get away with it.
As IRS Commissioner Charles Rettig, a Trump appointee who in his former life as a tax attorney represented scores of rich clients embroiled in wrangles with the government, noted in recent congressional testimony, “Budget cuts over the past decade have resulted in an agency that lacks the capacity to address sophisticated tax evasion efforts.”
A dramatic reduction in the number of audits performed obviously reduces the tax evasion that’s discovered, and thus the money that’s recovered. But such a diminution also emboldens would-be tax cheats, particularly those with the wherewithal to come up with complex tax avoidance schemes.
Biden wants to increase IRS funding by about $80 billion over a decade; the greater auditing and other tax-evasion battling that would buy would be targeted at those making more than $400,000 a year, which makes sense, because tax evasion occurs disproportionately among higher-income taxpayers.
Republicans purport to worry that a better-funded IRS will unfairly target conservatives. Those with long memories may recall that during Barack Obama’s presidency, congressional Republicans huffed and puffed endlessly in an effort to fan into flames a faux scandal based on the evidence-free insinuations that the Obama White House had directed the IRS to target Tea Party groups. A subsequent probe by the Treasury inspector general for tax administration refuted those phony allegations.
Dropping the effort to beef up the IRS may have been necessary to save the bipartisan infrastructure legislation, but that shouldn’t be the end of the matter. Such a package should be part of the pay-fors in the omnibus Biden-agenda bill the administration hopes to pass under reconciliation rules. That package won’t need Republican support — and thus will be able to do what’s fair and just on tax evasion without worrying about pandering to Republican fictions and phobias.
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