The Washington-Bayden administration plans to fund most of the large-scale investment in US infrastructure and employment by raising tax rates on the wealthy and businesses. However, according to a new study, wealthy individuals are already curbing about $ 175 billion in taxes each year through complex tax evasion schemes. In addition, experts warn that higher tax rates can further reduce tax compliance.
It was never a secret that the United States faces a “tax gap” every year-the difference between unpaid and paid taxes. But when researchers at the Internal Revenue Service worked with three academic economists to measure the amount of income wealthy Americans hide from IRS each year, their estimates far exceeded previous calculations. ..
Their paper, published this month by the National Bureau of Economic Research, uses comprehensive data from IRS records to underreport the top 1% of U.S. income earners on average 20% of their income each year. It shows that.
Sophisticated tax evasion
“At the top of income distribution is substantive and sophisticated tax evasion,” said Daniel Reck of the London School of Economics, one of the authors. “In particular, advanced tax evasion is often not detected by the random audits used to measure tax gaps, so we can see that there was even more tax evasion than traditional estimates suggest. “
Most of the unreported revenue is either hidden in an offshore account or the result of underreporting revenue from a “pass-through” business where profits are taxed as the owner’s recurring profit.
The main reason for the lack of tax evasion is the chronic shortage of IRS funds over the last decade, with a sharp decline in the number of audits of high-income earners, especially those with complex financial assets. That is.
There are also many gray areas where wealthy taxpayers can blur the line between legal tax avoidance strategies and illegal tax evasion. For example, a conservation easement allows a landowner who has waived the right to develop eligible real estate to deduct some of its value from taxes for 16 years.
Lek said years of legal struggle could be required to determine the legality of easements.
As Congress begins to discuss whether and how to implement the tax increase proposed by the Biden administration, it is revealed that the IRS will not raise an unexpectedly large amount of money each year.
President Biden has campaigned for taxpayers under $ 400,000 a year with a promise to raise taxes on the most earning Americans, while ensuring they do not face higher tax rates. He also vowed to raise corporate income tax from 21% to 28% and impose a minimum tax rate that businesses must pay each year, regardless of deductions.
There are several changes that can affect high-income earners and the wealthy. Biden has proposed raising the maximum income tax rate from 37% to 39.6%. Income above $ 400,000 is subject to a 12.4% social security tax split between taxpayers and employers. Dividends and capital gains are taxed at a maximum marginal tax rate of 39.6% if income exceeds $ 1 million.
Early estimates of the Biden project predicted that about $ 3.3 trillion would be raised in 10 years.
At a Senate Budget Committee hearing on March 25, lawmakers heard a very different assessment of the often-repeated claims made by the president that the wealthy are not paying a fair tax burden in the United States.
Wealthy Americans Pay 40% of All Income Taxes
Scott A, chairman of the Tax Foundation, a conservative think tank. Hodge testified that wealthy Americans now make up a larger portion of federal tax revenues than at any time since 1980.
“According to the latest IRS data for 2018, the top 1% of taxpayers paid $ 616 billion in income tax,” Hodge said. “It’s equivalent to 40% of all income tax paid, the highest share since 1980, and has a larger share of the tax burden than the combined bottom 90% of taxpayers.” Said.
“Similarly, in 2018, the top 0.1% of taxpayers paid $ 31.1 billion in income tax,” Hodge said. “This represents 20% of all income taxes paid, the highest level since 2001 as measured by the IRS data. The top 0.1% of taxpayers in 2018 have the top 0.1% of their income tax burden. I’m paying more than the bottom. Combined with 75% of taxpayers. “
At the same hearing, his grandfather Roy Disney helped establish the Walt Disney Company with Abigail Disney. Filmmaker Disney is also part of the voice movement of wealthy Americans who believe they should pay more taxes.
“I was born into one of the most famous families on the planet, in just two generations, from the poor to an embarrassingly wealthy family,” she said.
Disney said it is imperative to increase taxation on the wealthy, as wealth is extremely concentrated at the top of US income distribution.
“The bottom line is that wealthy people need to pay a fair distribution,” she said. “They need to stop whining and recognize taxes as a responsibility, not as a punishment. Any mother will tell you that children often lose differences. Great benefits from the American economy. You can surely find men and women who are. How to understand the distinction. “
In a 2011 treatise, a team of economists led by Henrik Jacobsen Kleven said that raising marginal tax rates would tend to increase the amount of tax evasion performed by wealthy taxpayers, potentially blunting the impact of the Biden administration’s proposed tax evasion. Showed that there is.
But the London School of Economics Wreck warned that it would be very simple to think of efforts to increase tax revenues as limiting efforts to raising tax rates and strengthening enforcement.
“I really don’t think it’s either suggestion,” he said. “I think the best bet is to do both to improve enforcement and raise tax rates, and a third tool that helps close many channels to avoid legally ambiguous taxes. is.”
Of course, that would be an even bigger challenge for the Biden administration than simply raising the tax rate and expecting a net positive effect on Treasury net income.
Wealthy Americans Dodge $ 175 Billion Taxes Each Year
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