To bridge the deficit, collect some taxes

January 12, 2012

By David Callahan

The views expressed are his own.

At a time when the U.S. government needs every dollar of revenue it can get, alarm bells should be sounding in Washington about a new IRS study showing that the Treasury is losing a fortune to tax evasion.

The study, released last Friday, found that the government missed out on $385 billion in uncollected taxes in 2006, the most recent year for which the IRS has complete data. If we extrapolate the IRS’s assumption that the U.S. government only collects about 85 percent of total tax liabilities, the revenue lost by the Treasury in the past decade exceeds $3 trillion.

That is serious money–nearly equal to all the new federal debt incurred during the Bush years. And without tougher action against tax cheats, the U.S. government stands to lose trillions more over the next decade.

Many of the biggest tax cheats are wealthy earners. While most working stiffs–the W-2 crowd–get their taxes automatically withheld from their paychecks, business owners and self-employed professionals have lots of ways to cheat. And cheat they do: Unpaid taxes by businesses and corporations accounted for nearly half of the total tax gap in 2006.

These figures only reinforce the public’s view that the U.S. tax system is unfair. According to a poll released last month by the Pew Research Center, 57 percent of Americans said that what bothers them most about taxes is that the wealthy don’t pay their “fair share” (compared with 28 percent who cited the complexity of the system and 14 percent the amount they paid as their top gripe).

Deficit reduction has been near the top of the congressional agenda for the past two years, so you’d think lawmakers would be eager to crack down on tax evasion. Dream on. Republicans on Capitol Hill, determined to downsize government, are working instead to cut the IRS’s budget.

In December, President Obama reluctantly signed a spending bill that whacks $305 million from the IRS budget, compared with 2011 levels. Republicans had initially tried to impose cuts twice that large–despite warnings from IRS Commissioner Douglas Schulman that such cuts would lead the IRS to collect $4 billion a year less in revenue.

But even the cuts that did pass will lead to lost revenue and increase the federal deficit. That makes zero sense. Clearly, for many lawmakers, hating government is more about the principle than the consequences.

In fact, it’s the Obama administration–supposedly so cavalier about tax dollars–that has led the charge to make sure the Treasury gets what it is owed. Two years ago, after Obama took office, the IRS created a special enforcement group focused on high-wealth individuals and has since ratcheted up its audits of these Americans. According to data released last March, highest-income filers were some 18 times more likely to be audited in 2010 than middle-income filers. That is way up from a decade ago, when the IRS audit rate for high-income filers was below 2 percent.

The IRS is also trying to outsmart cheaters with a comprehensive strategy that includes advanced computer systems and better reporting requirements to identify hidden income.

Meanwhile, the Justice Department has been going after Americans who stash cash overseas in illegal offshore accounts. Authorities have handed down numerous indictments in these types of cases in the past two years and have pushed key Swiss banks to turn over the names of tens of thousands of Americans with illegal accounts. Still, this battle has a long way to go; the government has estimated that over a million Americans have undeclared foreign bank accounts.

The United States isn’t alone in facing an epidemic of tax evasion. Cheating is much worse elsewhere and is a major factor in the budget woes of European countries. A study released in November by the Tax Justice Network estimated that $3.1 trillion is lost worldwide every year to tax evasion, with Europe accounting for half that total. Few countries lose more revenue than Italy, where, the report said, over a quarter of all economic activity goes untaxed–or a staggering $238 billion a year in a country with an economy seven times smaller than that of the United States.

Global leaders are waking up fast to the need for aggressive cooperative efforts to shut down offshore havens. One outcome of the G-20 summit last fall in Cannes was an agreement to fight these havens using diplomatic and economic pressure. European leaders hope these and other initiatives will bring in tens of billions in revenues.

Making it harder to hide money in foreign banks will also mean new revenues for the U.S. Treasury. Ultimately, though, plugging the biggest leaks in the U.S. tax system will require far more disclosure and tracking of business income, along with a substantially stronger IRS–none of which is popular with Republicans on Capitol Hill.

Even bigger changes may be needed on a cultural level. While the U.S. is not Italy, tax cheating has become increasingly normalized in this country–from the dentist with an offshore account to the Fortune 500 companies that mislead the IRS. Political leaders, from the president on down, not only need to embrace tougher anti-tax-evasion strategies but must also stigmatize the cheaters who are stealing from all of us.

PHOTO: The National Debt Clock, which displays the current United States gross national debt and each American family’s share, hangs on a wall next to an office for the Internal Revenue Service near Times Square in New York, May 16, 2011. REUTERS/Chip East


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Posted by Tax scandals of the stars – New York Daily News | | Report as abusive

“At a time when the U.S. government needs every dollar of revenue it can get…” BALDERDASH!

The U.S. Government has yet to separate it’s “needs” from it’s “wants” or to prioritize the obscene amounts it shovels out day after day, week after week, month after month and year after year. Giving it more tax revenue before it figures out it’s “needs” is like trying to put out a fire with gasoline.

The normal maintenance, rebuilding and expansion of the national infrastructure could and should be resumed with the money it wastes paying able-bodied individuals for 99+ weeks not to work or the “raise” for each new baby “feral families” that cannot provide themselves the most basic needs get. These latter expenses contribute NOTHING desirable t our society and never will.

Posted by OneOfTheSheep | Report as abusive

[…] this shortsighted? “At a time when the U.S. government needs every dollar of revenue it can get, alarm bells should be sounding in Washington about a new IRS study showing that the Treasury is losing a fortune to tax evasion,” wrote […]

Posted by Can the IRS learn to do more with less (of our money)? – AMA Shift | Report as abusive

I agree. The government doesn’t utilize effectively what it already gets.
Look at this new CFPB. In FOUR months
that agency—which is a rouge all unto itself—
hired over 700 federally paid and cadillacly benefited people! Where is THAT cash coming from? If they didn’t have any money before, how come they figured
that they could afford 700 more employees?

And then you got these people coming for a year or so to work for all of Obama’s wishes and then quitting with severence and pensions and all kinds of nice parting gifts.

AND then there is that HUGE travel bill for
Obama to open his mouth somewhere other than in the oval office where’s he’s suppose to be. People have TV’s now days. They can watch on TV if they need to see him.

And all these new government buildings
that need to house all of these new offices
like the new computer/digital/spy on
American’s complex that really should have
warrants. Homeland security, my eye. More like
make data banks to give to my Chicago geek group
to mine out of for campaigning. I think this is
illegal! DOJ shouldn’t just “ignore” all this
mob stuff going on.

No……the government has mushroomed in
size so that now it EATS 24% of our GDP.

Posted by limapie | Report as abusive

Tax evasion means higher deficits. That’s pretty much what this article is saying. Evasion also means that in spite of high tax rates imposed on most workers–the rate on an extra dollar of income at $50,000 (“marginal rate”) is 25%–the government still runs a massive deficit. So the opportunity to cut rates is almost nil.
The government wastes wast sums. The way to cut tax rates is to rein in spending AND tax evasion AND legal tax avoidance by slashing various loopholes.
“limapie” notes the government EATS 24% of our GDP. But it taxes only 16% or 17%. A big part, probably most, of the difference, which is the deficit, is tax evasion and avoidance.

Posted by writervic | Report as abusive

[…] Callahan has written a  blog under the above title on the Reuters web […]

Posted by To bridge the deficit, collect some taxes » Tax Research UK | Report as abusive

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Posted by Would You Let the IRS Do Your Taxes? – | | Report as abusive

More and more, Republicans and their supporters make no sense. The longer it goes on, the more rabid they become in refusing to see the forest AND the trees. Ignoring – the same as justifying – billions in lost tax revenues through evasion, then blaming payouts to the unemployed, and “feral families” for our economic problems leaves me nonplussed. It’s simple math even I can do.

The author wrote, “Clearly, for many lawmakers, hating government is more about the principle than the consequences.” I have to add, that statement holds true for the average under-educated Republican (who will also cheat on their taxes if given 1/2 a chance.)

OneOfTheSheep, Is it okay for some to cheat illegally and not others? As long as they’re American citizens it’s okay – not illegal immigrants, right? As a nation, we wouldn’t want our tax dollars to go to anything illegal, would we?

Posted by JL4 | Report as abusive


Painting good faith opinions you do not share merely causes others to read your comments more closely for credibility and factual accuracy.

You infer that the “…billions in lost tax revenues through evasion…” is exclusively a Republican problem. Not so. Neither party has a monopoly on morality, with particular thought to the “Chicago school” of politics. When the boat is sinking you plug each and every hole you see, not just the most obvious ones. You claim proficiency in math but gave no specific examples…just glittering generalities. We’re waiting…

“WE” taxpayers aren’t lawmakers. It is probably accurate to say that “WE” hate it when OUR government spends OUR hard-earned tax dollars as if they are merely ink and paper. Unfortunately to OUR government, more and more that is how THEY see them (since they live in an alternate financial reality utterly apart from ours.

“WE” hate it that our government has NEVER bothered with prioritizing public expenditures because BOTH parties have always believed “if they spend it we will pay”. NO MORE! America is BROKE!

Congress can have anything it wants, but not EVERYTHING it wants if there is ever to be fiscal sanity and sustainability. Each of us is free to “cheat” to some degree whether that be driving a bit over the posted limit, entering an intersection during the yellow, or doing our taxes. Each of us is individually responsible if we do so irresponsibly, such as going over 100 mph on a public road, ignoring red lights, or responding to post-submittal questions or a legal summons from the IRS.

If you have facts to show Republicans as less “moral” than Socialists (the infinitely more accurate description of the Democratic agenda of the last hundred years), please do present it in appropriate detail. I understand “cheating” to be seeking undue advantage by breaking rules.

For you and me to agree that anything is “cheating” we must have a common reference. In many cases, that’s pretty unlikely. What I see as ambition you see as greed. What I see as prudence you see as stinginess. If “cheating” is illegal, it MUST, by definition, mean that the rule broken is some statute legally applicable to the circumstance. In that context, I’m against it; whether by illegal immigrants or American citizens. OK?

Posted by OneOfTheSheep | Report as abusive

Time for a tax overhaul which is simple and doesn’t have loopholes. If everyone is actually paying their taxes then we could presumably lower rates and still have more revenue. I don’t think it’s fair to tax the wealthy at such a high rate that it approaches fifty percent of their earnings. Who would want to give half of what they make to the government? But for the wealthy to pay less than anyone else isn’t fair either. I go along with the Bowles-Simpson proposal. I don’t think we can stick it to the wealthy anymore than we can stick it to the poor. America is an incredibly wealthy country. We just all need to try to see ourselves as a whole instead of us and them and get our house in order.

Posted by lhathaway | Report as abusive

I think the discussion is incomplete so long as it is ALWAYS about “more” revenue and NEVER about how much is ‘enough” revenue. Politicians of neither party are willing, if capable, of putting the words “enough” and “revenue” together any more than employees will ever believe themselves paid “enough”. Human nature is not logical.

Posted by OneOfTheSheep | Report as abusive

This is the surest sign that the GOP does not care one bit about the deficit.

The GOP wants to scream and scream – Joe Scarborough comes to mind – that the deficit is a crisis, but are unwilling to treat it like a crisis and get a plan to get us out of it as soon as possible, including raising revenues, they simply are not serious and simply want to use it as a ruse to justify killing Social Security and Medicare.

Posted by emm305 | Report as abusive

All efforts to tackle tax evasion always target the ordinary man or best case the small entrepreneur. But the major league tax evaders are the multinational corporations which can do more or less what they want. Politicians will never go for them. Revolving doors between Governments and large corporations are more than obvious and one hand washes the other. Just have a look at who are the donors for election campaigns…
And what about the OCDE? They proudly announce their success on fighting harmful tax practices, but this is just propaganda. Don’t believe the hype. Have you seen their actual list of tax havens?  /

As per the lates “gray list”, updated in may 2012, there are only two tax havens left in the whole world. Do you think they are serious?

Posted by taxhaveninfo | Report as abusive