Costly inequity built into the system
By Gerald E. Scorse, guest columnist for Progressive Charlestown
Charges of rigging fill the air in today’s America.
Elections, the economy, college admissions, the list seems endless. Whatever
the truth in other cases, our tax collection system is undeniably rigged. It’s
been so from the beginning, rigged against the vast majority of workers.
In 1943, under pressure to pay for World War II, Congress passed a law requiring employers to withhold taxes and
report the incomes of their employees. The same law implicitly allows
self-reporting by huge numbers of largely high-income taxpayers: landlords,
self-employed professionals, small businesses, et al.
Tax compliance figures for the two groups differ starkly. The latest
estimate from the Internal Revenue Service shows 99% compliance by wage and
salary earners. Self-reporters, by contrast, are evading scores of billions in
taxes year after year.
Here are the crucial IRS numbers:
“Findings from earlier tax gap analyses that compliance is higher when amounts are subject to information reporting and even higher when also subject to withholding, continue to hold….Misreporting of income amounts subject to substantial information reporting and withholding is 1 percent; of income amounts subject to substantial information reporting but not withholding, it is 7 percent; and of income amounts subject to little or no information reporting, such as nonfarm proprietor income, it is 63 percent.”
Self-reporters take several forms, for example partnerships,
S corporations and limited liability companies (LLCs). They self-report via
numerous avenues: business income, corporate income, self-employment taxes,
credits, and more. If self-reporters have taken any capital gains in the stock
market, brokerage firms are now required to report that income to the IRS. It’s
the only significant instance of their income getting the same reporting
treatment as wages and salaries.
The most recent IRS figures cover the period 2008-2010. Adding
up all the under-reported categories, the agency estimated Treasury losses at
$387 billion a year. Stunningly, self-reporters paid little more than a third
of what they should have. (Really, you say? Go back to that IRS quote, and do
the math for yourself.)
“A high level of voluntary tax compliance remains critical to help ensure taxpayer faith and fairness in the tax system. Those who don’t pay what they owe ultimately shift the tax burden to those who properly meet their tax obligations. The new tax gap estimate updates long-standing research findings that information reporting and withholding are strongly associated with higher levels of voluntary compliance.”
The words may be measured, the
volume low—but it’s actually a primal scream with an unmistakable message. The
IRS is telling Congress that self-reporting dooms the federal government to
losses of about $400 billion a year. It’s also saying that America’s wage and
salary workers deserve an unrigged tax collection system—everybody’s income
should be reported, not just theirs.
Employers do the reporting for
their employees; brokerage firms do it for stock market capital gains; let’s
turn to banks to do the job for current self-reporters. Income and expenses are
the major information components.
Some way, somehow, those components have to be identified, separated, and added up. At year’s end, the totals should be reported to the IRS and to the income recipient. It would be nothing more (and nothing less) than a W-2 for self-reporters: the same as most American workers have been getting for decades.
Some way, somehow, those components have to be identified, separated, and added up. At year’s end, the totals should be reported to the IRS and to the income recipient. It would be nothing more (and nothing less) than a W-2 for self-reporters: the same as most American workers have been getting for decades.
If current
technology isn’t up to the job, then invent technology that is. There’s nothing
digital magic can’t do. If you don’t believe it, ask Siri (or better yet, Zora).
The bigger
obstacle by far is political. The investment community fought relentlessly
against basis reporting of capital
gains. Entire other
communities will do likewise to resist, demonize and delay any self-reporting
reform.
Listen to Bruce Bartlett in a 2012 op-ed examining, yes, the tax gap: “People don’t like the intrusion into their privacy — and the diminution of their opportunities for tax evasion — and businesses don’t like the cost or the alienation of their customers.” To which the obvious answer is: what does “liking” have to do with it?
Listen to Bruce Bartlett in a 2012 op-ed examining, yes, the tax gap: “People don’t like the intrusion into their privacy — and the diminution of their opportunities for tax evasion — and businesses don’t like the cost or the alienation of their customers.” To which the obvious answer is: what does “liking” have to do with it?
Let’s finish with a
billion-dollar idea.
The Treasury could attack that
$387 billion-a-year revenue loss by inviting all techies to compete for a $1
billion prize. The goal: develop easy-to-use, non-intrusive software that
eliminates the self-reporting shortfall.
The nation could wind up with
the bargain of the century. The loss from under-reporting of income amounts to
$1.06 billion a day. Prize-winning software could recover that amount by the
first coffee break of Day Two.
And in the process, end 75 years
of tax unfairness.
This piece first appeared at www.nydailynews.com
Gerald E. Scorse helped pass the bill requiring basis
reporting for capital gains. He writes on taxes.