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Rich Americans are hiding large amounts of their income from the IRS. There’s a simple fix. : Economics

When the federal government began withholding income taxes on workers’ wages during World War II, innovation was presented as a matter of fairness, a way to ensure that everyone was eligible. pay wage. Irving Berlin wrote a song to the Treasury Department: “Did you see those bombers in the sky? Rockefeller helped build them. Me too.”

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 per worker, so it can be difficult to falsify figures.

However, the tax burden is growing because the government does not have an equivalent system for verifying income from businesses. As a result, most salaried employees pay their share fairly while many business owners engage in blatant fraud at public expense.

In one remarkable thing Analysis in 2019The Internal Revenue Service estimates that Americans report their taxes to less than half of their gross income without being subjected to some form of third-party verification like the W-2. Billions of dollars in business profits, rentals, and royalties are hidden from the government each year. In contrast, more than 95% of wage income is reported.

Unreported income is the biggest reason why unpaid federal income taxes could reach more than $ 600 billion this year and more than $ 7.5 trillion over the next decade. That’s a staggering figure – more than half of the federal deficit is expected for the same period.

The government has a primary obligation to enforce the law and prevent this tax fraud. Failure to do so means that the burden of paying public services falls on salaried workers more than business owners, exacerbating economic inequality. The fact of rampant fraud also undermines the legitimacy of the tax system, which still depends significantly on good American participation.

Proposals to bridge this “tax gap” often focus on reversing the long-term decline in funding for the IRS, allowing the agency to hire more workers and test richer taxpayers. . But Charles Rossotti, who led the IRS from 1997 to 2002, made a convincing argument that such an approach was inadequate. Mr. Rossotti said that Congress also needs to change the rules, by creating a third-party verification system for corporate income.

The core of Mr. Rossotti’s smart proposal is to get that information from banks. According to his planThe government will require banks to publish annual account statements of total in and out amounts, much like the 1099 tax form investment firms must provide to their clients.

Individuals will then have an opportunity to match what Mr. Rossotti named their “1099New” forms with the income reported on their personal tax return. For example, one can claim that a particular deposit is a tax-free gift.

Mr. Rossotti has proposed that the IRS require new forms only for people whose taxable income is above the generous threshold. A bill covers Mr. Rossotti’s plan, introduce California Representative Ro Khanna, setting that threshold at $ 400,000, to minimize the burden on small businesses. Undoubtedly, the money was meant to chase the wealthy for tax fraud, but equity argues that business income, like earnings from wages, is subject to a reporting standard. unified. Small businesses also have to pay taxes.

The proposal will not increase the amount anyone owes tax. Instead, it will increase the amount of people who are currently fraudulently paying taxes.

It will have the immediate benefit of frightening people.

Consider what happened after Congress passed a 1986 law that required taxpayers to list a Social Security number for each person declared a dependent. At that time, the government could not easily check all of those requests, but it was the request that caused the fraudulent situation to plummet. Next year, seven million children Suddenly disappeared from the tax return.

However, in order to realize the full benefits of the new data, Congress needs to invest substantially in upgrading the outdated IRS computer system and hire sufficient qualified staff to consider case studies. suspect and blame cheaters.

For example, in 2008, Congress passed a bill requiring credit card processors to report payments processed on behalf of online retailers on an annual form called 1099-K so that the IRS can verify earnings reported by those retailers. But in December, the inspector general of the Treasury Department report that the “resource limit” prevented the IRS from investigating more than 310,000 cases in which individuals and businesses that did not report income of more than $ 330 billion listed on 1099-Ks.

Republicans of Congress, unable to muster public support to cut federal spending, pursued that goal indirectly by limiting federal revenues, in part by take away the budget of the IRS. The proportion of all audited tax returns fell 46% between 2010 and 2018, according to the report National Assembly Budget Office. For millionaires, the audit rate dropped to 61%. Today, the government uses fewer people to track down corpses than at any time since the 1950s.

The result is a parallel increase in federal debt and tax fraud.

Mr. Rossotti, along with Harvard economist Lawrence Summers and University of Pennsylvania law professor Natasha Sarin, argued in an analysis. published in November that investment of $ 100 billion in the IRS over the next decade, in technology and personnel, combined with better data on business income, will enable the agency to collect as much as $ 1.4 trillion. legal tax revenue that would otherwise not be collected.

The logic of such an investment is overwhelming. Governments can crack down on crime, improve tax fairness – and raise the necessary amount of money in negotiations. There are many proposals to raise taxes for the rich. Let’s start by collecting what they owe.



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