Richest 1% don't Report 21% of their income
By
Jake Johnson, staff writer
for Common
Dreams
A new analysis by IRS researchers and academics published Monday morning estimates that the richest 1% of U.S. households don't report around 21% of their income, often using complex tax avoidance strategies that allow them to outmaneuver the federal government's increasingly rare audits of the wealthy.
Led
by two IRS researchers as well as Daniel Reck of the London School of Economics
and Emmanuel Saez of the University of California, Berkeley, the new
paper (pdf) finds that 6 percentage points of the richest
households' unreported income "correspond to undetected sophisticated
evasion" such as offshoring, pass-through businesses, and other
avoidance tactics.
"From
a policy perspective, our results highlight that there is substantial evasion
at the top which requires administrative resources to detect and deter,"
the authors write. "We estimate that 36% of federal income taxes unpaid
are owed by the top 1% and that collecting all unpaid federal income tax from
this group would increase federal revenues by about $175 billion
annually."
"There has been much discussion in the United States about the fact that the audit rate at the top of the income distribution has declined," the paper continues. "Our results suggest that such low audit rates are not optimal."
ProPublica reported in 2019 that in recent years,
the IRS has audited the poor at around the same rate as the richest Americans,
who have been the principal beneficiaries of years of budget cuts and staff shortages at
the federal tax agency.
When
the IRS actually conducts them, random audits "do not capture most tax
evasion through offshore accounts and pass-through businesses, both of which
are quantitatively important at the top," according to the new analysis.
As a result, the paper's authors note, the incomes of the wealthiest people in
the U.S. and the country's overall inequality are significantly underestimated.
Reck
of the London School of Economics told the Wall Street Journal ahead
of the paper's official release that the findings show "there is more
revenue than you might have thought at the very top."
"What's
needed," argued Reck, "is a broader strategy that involves increased
scrutiny of pass-through businesses [and] investments in the comprehensive
audits that the IRS does in its global high-wealth program."
Last
month, Rep. Ro Khanna (D-Calif.) introduced legislation that would
provide the IRS with $100 billion in additional funding over a decade so the
agency can more closely examine and crackdown on tax evasion by the richest
Americans. The bill would invest in improvements to IRS technology, require
audits of the richest individuals and corporations, and implement more strict
income reporting requirements.
Khanna's
office estimates that the Stop Corporations and Higher Earners From Avoiding
Taxes and Enforce Rules Strictly (CHEATERS) Act would bring in $1.2 trillion in
federal revenue over 10 years.
"We
know our tax system is broken, and it's long past time we start fixing
it," Khanna said in a statement. "The ultra-wealthy play by different
rules than the rest of us."