The opportunity for tax cheating -- and the place where improved compliance recovers the most money -- is with the richest taxpayers.
First, let's get something straight. I am not against rich people. I am in favor of prosperity. I want more of it, and I want it for everyone.
Talking about tax-cheating-millionaires is dangerous ground for any Democrat. It comes across as hostile to the group -- wealthy people -- instead of hostility to the act of tax cheating. I cringed inside when I heard Bernie Sanders condemn "millionaires and billionaires" as if they were immoral somehow for having gotten rich. Or as if property is by definition "theft" from someone more deserving. It isn't, not to my mind. It usually is the result of having created value. Most Americans feel that way, that wealth is a good thing. People buy lottery tickets, not in the dream that someday they can get an extra $2/hour to keep working at a job they endure because it pays the bills. They imagine getting rich. Democrats will do better in elections if their policy and messages are squarely on the side of more prosperity for their voters. A chicken in every pot, yes. Also no debt. And a new Ford F150 truck in the garage, if they want a truck. Or maybe a BMW. And a bedroom for every child, a big yard, and a landscape crew to take care of it.
Wealthy people are likely to have complicated tax returns. Those create huge opportunities for gray-area cheating on taxes. Combining opportunity with self-interest leads to widespread tax underpayment.
The revenue received by auditing the wealthy climbs substantially at the 95% percentile of income. Audits of average Americans, up through the 70th or 80th percentile of income have the effect of enforcing the institutional norm of tax compliance. That is a worthy goal, but the significant net revenue comes from auditing the wealthy.
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Currently the chances of being audited are small. Every professional tax preparer knows that. So do well-informed taxpayers. The real leverage in tax compliance comes from the deterrent effect of the possibility of audit. The IRS calculates 3-to-1 deterrent-leverage for the median taxpayer, and 12-to-1 for the top 10% of taxpayers.
Funding for IRS enforcement dropped after 2010. Democrats attempted to restore funding back to the 2010 level of overall service and enforcement to add back lost personnel.
A credible chance of an audit will lower the deficit because it will raise money legally owed. It will increase tax fairness because honest taxpayer won't be subsidizing dishonest ones. It will do one more thing important in a healthy democracy. It will re-affirm a social norm that "good Americans obey laws, including paying one's taxes." After all, not enforcing the law implies that the government doesn't really expect compliance, not really.
Trump has been the example of the "bad boy," the scofflaw. The system is rigged, he says, so only saps -- losers -- play along. He has done this as regards taxes ("I'm smart."), on emoluments, on the Hatch Act, on awarding pardons, on documents, on elections, on the peaceful transfer of power. Leaders set examples. Republican legislators who opposed re-establishing credible likelihood of being audited -- every single Republican in Congress -- were part of that mindset of saying the laws we pass aren't worthy of being enforced. It is a dangerous one for democracy.
We should welcome tax compliance. File an honest tax return. Expect others to do so as well. Audits: Bring them on.
8 comments:
The U.S. has one of the most complex tax systems in the world. It doesn't have to be that way. If we did it right, we wouldn't even need audits:
https://www.theatlantic.com/business/archive/2016/03/the-10-second-tax-return/475899/
Taxes are necessary as the means to pay for shared resources. Where it goes haywire is when successful people and enterprises use their wealth to corrupt the system in their favor which is detrimental in two ways:
First, they gain an ever increasing advantage making it more difficult for others to succeed.
And second, the unfairness causes social unrest, not the least of which is exacerbated by the need for the corrupt to cover their deeds with deflection and pandering to prejudices.
If we make the connection between taxes and lobbying and campaign finance this points the way to a solution. But there is a bigger issue.
Too many of us mistakenly worship the wealthy, a false idol is there ever was one. The average person has more in common with the homeless than a Bezos, but that's a hard truth to admit.
First off, th cheats come from all levels - rich, poor, and those in the middle.
The problem with audits is that chasing the low $$$ cheats cost more than what can be gained. The real question is how much cheating is actually going on.
I like the idea of a flat tax; I like the idea of a simple tax return. I really like the idea of electronic filing which would save a lot of money. Just think of all those paper returns for 1040A and simple 1040 returns. They are scanned and checked by manual labor which does cost a lot.
"The IRS reported that as of May 2023, approximately 134,224,000 tax returns were e-filed for Tax Year 2022 out of a total of 142,577,000 2021 Returns filed. This is around the same number of 2021 Returns e-filed in 2021 at this time (136,430,000 e-filed out of 144,341,000 total)"
That's almost 95%!
https://www.efile.com/efile-tax-return-direct-deposit-statistics/
Less than half of the e-filed returns come from people who do their own taxes; the majority of the e-filers are tax professionals doing taxes for individuals, couples, and businesses.
There are a lot of audits. Many of the low-income filers make mistakes claiming EITC credits. Easy to detect and resolve, but time consuming for IRS staffers.
Lots of stats here:
https://www.irs.gov/about-irs/irs-audit-rates-significantly-increase-as-income-rises
A higher percentage of high-income filers get audited. Looking at actual numbers rather than percentages make it look like the rich aren't audited enough. Well, there are fewer high-income people than low-income people. (Lie, damn lies, and statistics come to mind .
Seems the simple solution is to simplify things. Unfortunately, frequently the pursued change is higher taxes for some rather than a broad-based revamp of the entire system.
Everyone should remember is that we have an income tax, not a wealth tax.
Many public and private pensioners are millionaires but don't even realize it. Annuity holders who receive $65,000 in income per year are technically a millionaire as it takes that kind of investment -- ($1,000,000) -- to generate that kind of guaranteed annuity income. Remember that when pensioners bellow "tax the rich" and make them pay their fair share.
In Oregon, Tier 1 PERS recipients are guaranteed a a 7% return on their pension fund, regardless of market performance. And their benefit is based on the wages/salary over their last few years of employment, not their many years of employment and contributions. This costs the public agencies, not the PERS member. The public agencies have to make up the difference from their budgets.
Finally, some have tax-free municipal and public agency bonds for investments? How much should these taxpayer be taxed?
I agree with Peter. We need more audits, especially of the wealthy.
We also need a simpler tax system, so there would be fewer tricky stunts that a highly paid accountant could pull.
Peter said, “… I cringed inside when I heard Bernie Sanders condemn "millionaires and billionaires" as if they were immoral somehow for having gotten rich.
While I don’t think you necessarily HAVE to be immoral to be a billionaire, I do think billionaires who hoard their money when there are so many people who are homeless, among other things, are immoral. Or, in some cases, maybe AMORAL.
Let me know if I’m wrong by saying so. Anyone who doesn’t respond is automatically assumed to agree :)
Rick M says, “ The average person has more in common with the homeless than a Bezos” Rick, the way this country is headed, we’ll soon be able to say, “The average person IS homeless”
How long before the homeless surpass 50% of the population?
States with most people experiencing homelessness (%):
California 43.7
Vermont 43.1
Oregon 42.3
Hawaii 42.4
New York 37.4
Please ignore those homeless figures. They’re crazy. I believe now that the numbers represent the percentage of chronic homeless among the TOTAL homeless not % of total population.
Boy, do I feel stupid :-P
Malcolm’s numbers might seem plausible after a stroll through downtown Portland… 😱😀
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