To bridge the deficit, collect some taxes
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