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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, December 27, 2012

Madoff: The Wealthy Should be Required to Report All Income

Washington Post op-ed:  Tax Fairness and the Wealthy, by Ray D. Madoff (Boston College):

A central question for leaders confronting our fiscal crisis is fairness in the tax system — in particular, whether the wealthiest Americans are paying their fair share. While there appears — or, at least, appeared — to be some agreement between President Obama and House Speaker John Boehner that taxes on the wealthy must go up, the amount of the increase remains undecided. Many argue that the wealthy are already paying a disproportionate share of taxes, a view that new data from the IRS appear to support. Missing from the conversation, however, is an appreciation of the way these data fail to accurately describe the true income of the wealthiest Americans. 

The IRS recently released its analysis of 2010 tax returns, which shows the allocation of taxes over different income groups. This information is both informative and misleading. According to these latest figures, in 2010 the top 1% of earners (those with adjusted gross incomes of at least $369,691) paid about 37% of all income taxes but reported just less than 19% of all income. Based on these data, the U.S. income tax system looks truly progressive. This lends credence to the view that the wealthy are paying even more than their fair share.

But statistics can be only as good as the information on which they are based, and here the data are fundamentally misleading. People pay income tax only on amounts that Congress counts as income. This excludes the sources of revenue most commonly enjoyed by the richest Americans: gifts, inheritances, distributions from trusts and proceeds of life insurance.

How much tax-free income do the wealthy enjoy each year? While we can all guess — and common sense tells us that the numbers are significant — we cannot know for sure. This income is not only tax-free, but there also is not even an obligation to report it. ...

It is time for Congress to shine a light on the types of income most enjoyed by the wealthy. Individuals should be required to report all sources of income, including gifts, inheritances, life insurance and distributions from trusts so that we can begin to assess the impact of these exclusions.

Everyone agrees that fairness matters when it comes to income taxes. But we cannot have an honest discussion about tax fairness when we are kept in the dark about how much income people actually receive. Only when full reporting is required can we have an accurate picture of people’s true income. Then we can begin to fashion a tax plan that is fair for all Americans.

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Under what authority, if any?

Posted by: Prof Mad SD | Dec 27, 2012 2:34:38 PM

Who is this person? Gifts above a certain amount are taxable to the giver. Distributions from trusts are normally income that is taxable to the distributee, since the trust tax rate is higher/fatser than the individual rate. The wealthiest are exposed to estate tax - does it matter whether the tax is paid by the dead donee or the recipient. Many states have inheritance taxes that are paid by the person inheriting.

The point of this article is to change the definition of taxable income in such a way as to make the fact that the top earners pay tax at twice the rate of their income when the bottom 47% pays no federal income tax.

Also, all the types of income mentioned would have already been subject to income tax (when earned) and capital or income tax when the after-tax earnings grew. I presume the author feels its bad enough if you made a lot of money, you shouldn't be allowed to pass it on to heirs.

To have an "honest" discussion, we need to first discuss the author's biases and the fallacies buried in his article.

Posted by: air65cav | Dec 27, 2012 2:46:03 PM

You fail to realize that inheritances are already taxed prior to receipt; then the income from these inheritances is taxed as earned. Each omission of reportable transactions is reported some way already. it is just that Congress has expressed the "will of the people" in determining which "receipts" are to be taxed again.

Consider directing your comments to Congress not to us taxpayers who are already overtaxed and under served and you, as the prototypical academic elitist, sit in your ivory tower of academia expounding on those who really work for a living and are successful at it and whether or not they pay their fair share. Perhaps we ought to tax certain professions differently so that those who contribute not to the economy but draw from it pay at higher rates than those who contribute to it with their effort and talents.

Posted by: Shotgun | Dec 27, 2012 2:46:19 PM

What an amazing idea. Skew the data to "prove" the wealthy pay less than their fair share of the tax burden. To yield a result with statistical integrity, the analysis must consider all accessions to wealth realized by all Americans across the economic spectrum. Thus, the less-than-wealthy should have to report the federal government subsidies they receive (EITC, food stamps, school lunches, housing subsidies, etc.) as income so that we can begin to assess the impact of all taxable income exclusions enjoyed by all Americans, measured on a level playing field.

Posted by: Jake | Dec 27, 2012 3:02:50 PM

Does the author advocate taxing Boston College on all of its income? Taxing "Big Ed" would close their giant loophole and cause them to pay their fair share of taxes.

Posted by: Steve | Dec 28, 2012 7:36:38 AM

The article is foolish, but only because it lists the wrong items as uncounted income.

If we want to look at the effect of untaxed income on income distribution, we should look at:
1. Unrealized capital gains and losses (the losses are huge in bad years--- would rich people have had negative net income in 2008?).
2. Untaxed transfers from the government---Medicare, Medicaid, food stamps.
3. Income untaxed because of evasion, including income from drugdealing and theft.

Posted by: Eric Rasmusen | Dec 28, 2012 7:50:57 AM

I always find it amazing the number of "tax lawyers" and "business lawyers" who have never had an accounting course. I wonder about Dr. Madoff's background.

Posted by: save_the_rustbelt | Dec 31, 2012 7:05:58 AM

I couldn't agree more with the writer. "...we cannot have an honest discussion about tax fairness when we are kept in the dark about how much income people actually receive" is a statement dear to my heart, but I look at it a little differently.

I'm always intrigued by elite writers who want to redistribute income but refuse to track it. Government already cuts W2's for their employees and 1099-MISC for their independent contractors. Actual workers.

The spending for entitlements is what is sinking the country. NON-workers. asks meself...why is there no 1099-GOV for government 'income,redistributed' which occurs at EVERY level of goverment? Whether food stamps from the feds or air conditioning in the Austin summer, people are receiving 'income,redistributed' and it is not being tracked at all.

Why are my sweat-stained 1099-MISC not mirrored by 1099-GOV? Because the politicians of ALL stripes depend on them to buy votes in one way or another. Stumping for support of the "poor" or railing against the waste of government, neither wants to track it.

I promise you that porting a database of food stamp recipients over to an existing system that cuts 1099-MISC would not take two weeks. Getting the IRS to duplicate the 1099-MISC and call it 1099-GOV could take until the cliff at the end of the republic.

Why can't sheep smile?

Posted by: SenatorMark4 | Dec 31, 2012 1:08:46 PM