New York Times Sunday Review, You Can’t Tax the Rich Without the I.R.S.:
If no one is around to root out offshore accounts, tax cheats won’t be punished.
The hot policy in Democratic circles these days is raising taxes on the rich. Senator Elizabeth Warren has a plan to tax “ultramillionaires,” as she calls them. Senator Bernie Sanders wants to expand the estate tax. Representative Alexandria Ocasio-Cortez has floated raising the top income tax rate to 70 percent for those making over $10 million a year.
But before this country raises taxes, it should grapple with something much more prosaic but equally important for tackling inequality: saving the Internal Revenue Service.
Already, wealthy people and corporations easily get around today’s rules. However tough any new laws might seem, they’d soon be undercut.
Slowly and quietly over the past eight years, the I.R.S. has been eviscerated. It’s lost tens of thousands of employees. It has fewer auditors now than at any time since 1953. In real dollars, the agency’s budget has dropped by almost $3 billion since 2010.
Businesses and the wealthy benefit the most from this state of affairs. The largest corporations in America used to be audited every year. That started to change when the cuts began, and today, the audit rate has fallen by half. It’s a similar story for individuals making $10 million or more a year: With twice the chance of escaping I.R.S. scrutiny, the ultrarich are much less likely to lose at the game of audit roulette.
Fixing the problem will require more than increasing the I.R.S.’s budget (though that would certainly help). It’s about having the right personnel with the right skills. Today, the wealthy and corporations have the I.R.S. outgunned. The ultra-affluent — with the help of legions of tax professionals — make domestic income disappear overseas or hide it in a pyramid of partnerships. It’s like trying to take on a modern army while armed with spears and clubs.
The I.R.S. has difficulty tracing the income of the superwealthy or countering their sophisticated arguments about why what appears to be one type of income is actually something else. The agency has also trouble valuing their assets (a problem that, as The New York Times revealed, dates back at least to when Fred Trump was misleading the I.R.S. about how much his buildings were worth). By the public admission of numerous I.R.S. officials, it has long done a poor job of scrutinizing complicated partnerships to understand who owns what portion of what stock.
The top 0.5 percent of highest-earning Americans account for about a fifth of the income that’s hidden from the I.R.S., according to one University of Michigan study, or more than $50 billion a year in today’s dollars.
It’s much easier to enforce the tax laws for the bottom 90 percent of earners. Wages are reported straight to the I.R.S., and computers can easily check that tax returns accurately report that income. This means that inadequate enforcement of the tax laws necessarily has a regressive effect, liberating those at the top from scrutiny while the masses continue to be tracked by machines.
It’s much easier to enforce the tax laws for the bottom 90 percent of earners. Wages are reported straight to the I.R.S., and computers can easily check that tax returns accurately report that income. This means that inadequate enforcement of the tax laws necessarily has a regressive effect, liberating those at the top from scrutiny while the masses continue to be tracked by machines. ...
So, what to do? One 2020 candidate already has a bold proposal to resuscitate the I.R.S. It’s a plan to pump tens of billions into the agency, enough to fund a second army of agents. That candidate’s name is Donald Trump.
Of course, it was Mr. Trump’s party that gutted the agency, costing the country, we estimate, more than $100 billion in lost revenue. The president’s 2020 budget, however, did propose adding $15 billion over 10 years to the I.R.S. enforcement budget, a move that would be a significant increase to the agency’s budget. The administration estimated this would produce revenue of at least $47 billion. The question arises: Has the administration genuinely had a change of heart? Or is this merely a neat trick to make deficit projections appear smaller?
So far, this is all just talk. It is, though, one of the few areas where Mr. Trump and Democrats are in substantive agreement. Democrats in the House recently proposed a $400 million I.R.S. budget increase next year.