There’s a simple way to make the 1% to pay up and make the tax system fair to everyone
Our investigative series
The Koch Papers illustrates many deep problems in America’s creaky, century
old-income tax system, especially how our Congress has through favors to donors
has transformed it into has two tax systems, separate and unequal.
These dual systems
pose a threat to our nation’s social stability, to our national security and to
America remaining a nation of equality under law.
But there is a simple solution to this, as we shall see. It requires only that Congress stand up for honest and fair tax law enforcement, not the interests of those major campaign donors who cheat.
But there is a simple solution to this, as we shall see. It requires only that Congress stand up for honest and fair tax law enforcement, not the interests of those major campaign donors who cheat.
One of the most
significant lessons applies to William Ingraham Koch and his company whether or
not, as his former chief tax executive claims, the IRS failed to curb massive
income tax cheating.
That’s because if Koch did find a way to lawfully collect more than $100 million in tax-free profits annually it is just as much a public issue as if he did it by cheating.
That’s because if Koch did find a way to lawfully collect more than $100 million in tax-free profits annually it is just as much a public issue as if he did it by cheating.
Congress, Are You
Listening?
No reasonable person
can defend a system under which workers laboring all year for the $7.25 federal
minimum wage pay more than a dollar a day in income taxes while billionaire
business owners pocket millions in profits tax-free.
Nor is there any
reasonable defense for hamstringing our tax police by requiring them to
intensely audit the working poor while cutting resources to audit the well to
do and the corporations they own.
America’s federal income tax system was long regarded as the most efficient and effective in the world, studied by tax administrators from Argentina to Zimbabwe. China’s system was designed four decades ago with American advice. Britain’s was reformed a quarter century ago to be more like America’s.
But today we suffer in
myriad ways because our Congress has failed in its duty to ensure that our
federal tax system flows from the economy instead of cutting against it while
making sure that the tax police—the IRS—enforce our tax laws equal shares of
fairness and vigor. The Koch Papers series illuminates all of these problems
and more,
The creation of two
tax systems grows from Congress treating Americans differently depending on how
they earn their daily bread.
Congress does not
trust those in the first system—workers, pensioners and investors who collect
dividends and interest.
For these Americans
income is independently verified and taxes are withheld before people get
paid.The IRS knows how much you made because Congress requires your employer,
pension agency or stock broker to report your income to IRS computers.
Under this reporting
regime, cheating is nearly impossible.
America’s other income
tax system applies to wealthy people who own their business, including Bill
Koch and Donald Trump.
No Income Verification
Congress trusts such
people to faithfully report their revenues, profits and losses and to pay 100%
of their income taxes voluntarily. Unlike workers, there is little or no
independent verification of business income.
It makes no sense to
regard them as models of integrity, given decades of experience showing that
tax cheating is rampant. One man pocketed
$450 million tax-free with the IRS in the dark until a jilted
lover turned him in. The IRS admitted in
2005 that it has no idea about the extent of high-end tax
cheating.
Audits are the only
way to have any assurance that rich business owners are paying the taxes that
Congress requires.
But the number of
audits has been shriveling along with time spent per audit. In addition, the
IRS adopted rules two decades ago, at the behest of Congress, requiring
auditors to warn companies in advance what issues would be examined and to not
look more broadly unless the evidence they found rose to indications of
criminality.
The IRS long ago abandoned quality in corporate audits in favor of closing them quickly. And it has told Congress that the tax code is so complex that it cannot untangle many of the tax shelters sold by Wall Street.
The IRS long ago abandoned quality in corporate audits in favor of closing them quickly. And it has told Congress that the tax code is so complex that it cannot untangle many of the tax shelters sold by Wall Street.
Corporations have
learned that withholding documents is a good way to avoid getting caught not
paying all the taxes they owe. That is one of the many accusations against Bill
Koch and his company leveled in whistleblower complaints by Charles Middleton,
Koch’s former top tax executive. Koch and his Carbon Oxbow simply say the
IRS closed its audit with no changes.
Playing ‘Audit Roulette’
Middleton gave the IRS documents that he says show Koch and his company knowingly engaged in “audit roulette,” which is cheating in the expectation that it was unlikely to be caught by IRS auditors and, if is, by withholding documents.
Last year the risk
that millionaires and billionaires would have their tax returns audited was
1-in-31.
Every tax expert I know says the willingness to play audit roulette has been rising as audits of the rich and their companies have shrunk over the last three decades.
Every tax expert I know says the willingness to play audit roulette has been rising as audits of the rich and their companies have shrunk over the last three decades.
Tax audit roulette,
not incidentally, is a much safer bet than spinning the wheel in Atlantic City
where the odds are 19-to-1.
Audit rules for
partnerships, which do not pay taxes directly, are dramatically more in favor
of tax cheats. Over the last two decades, audit rates have ranged between 400-to-1 at the
turn of the century to 224-to-1 in
recently.
The falling audit risk
is measured by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University, which has a
federal court order requiring the IRS to turn over data monthly.
TRAC’s latest report documents “an alarming and continued downward spiral in government audits of the wealthiest taxpayers and America’s corporate giants.
Despite growing income inequality—where the top 1% of Americans control much of the wealth in the United States—less and less attention is being given by federal agents and investigators to determine whether these same individuals and businesses properly report their true incomes and pay taxes on these dollars. Billions of dollars are arguably at stake, as is American faith in the fairness of our federal tax system.”
The way to make the
system fair is to require withholding on all income. Business owners who take
money out of their companies should be required to rely on a trustee whose
legal duty is to withhold taxes and report the income, risking prison or
failure to do so. That is how the system operates for workers, pensioners and
investors.
Along with this
Congress needs to enact rules requiring the reporting of loans to and from
companies by their owners that are consolidated with individual income reports.
That will enable IRS computers to flag what appear to be loans being used to
disguise income, though in most cases follow up would be needed by humans.
In our complex 21st Century
economy we are beset with mind-numbing problems, many of which seem to defy
sensible solutions. But requiring that all income be verified and treating
business owners the same as their workers, that’s a simple problem that will
get fixed if we demand our Congress act in our best interests regardless of how
much it offends tax cheats among the political donor class.