Paul L. Caron
Dean



Tuesday, October 6, 2020

Sarin: The IRS Is Outgunned

We are outgunned 
Outmanned
Outnumbered
Outplanned

Right Hand Man, in Hamilton

New York Times op-ed:  The I.R.S. Is Outgunned, by Natasha Sarin (Penn Law & Wharton):

The president of the United States paid less in federal taxes than all but the poorest Americans the year he was elected. This is in large part because he lost more money than nearly anybody else in this country for years, a troubling fact given his promise to “run America like his business.”

But the responsibility for his meager $750 tax bill does not lie with President Trump alone, nor with his tax advisers. Instead, the newest revelations put a very famous face on a problem that has long existed: The wealthy aren’t paying what they owe, and our tax system allows it.

This is not a new problem, but it is one that has gotten worse in the last decade, the result of a partisan attack on the I.R.S. that has deprived it of the resources it needs to police evasion aggressively. In the last decade, the I.R.S.’s budget has fallen (in real terms) by nearly 15 percent. Its enforcement budget has fallen 25 percent over this period, and its work force has been slashed by 20 percent.

These grim numbers do not even take into account the growth in the economy and the increasing complexity of tax returns. In fact, as a share of gross tax collections, the I.R.S. budget is down nearly 50 percent from its peak in 1993.

As my work with the former Treasury Secretary Lawrence Summers shows, the result of this underinvestment is that the I.R.S. today cannot administer tax laws effectively. Based on current trends, in the next decade the I.R.S. will fail to collect an estimated $7.5 trillion in owed tax. That “tax gap” corresponds to nearly 3 percent of G.D.P. annually.

The beneficiaries of a gutted I.R.S. are the elite. ...

 a robust attack on the tax gap will signal an end to our two-tiered tax system, where those with enough money are able to subvert the tax laws with little fear of repercussions. At a time when inequities in the criminal justice system are appropriately a cause of significant concern, those same inequities in tax administration deserve the attention of policymakers.

A quotation from Justice Oliver Wendell Holmes is etched on the wall at I.R.S. headquarters: “Taxes are what we pay for a civilized society.” President Trump is one insidious example of the wealthy not paying their fair share. We have to invest in tax compliance so they are forced to.

https://taxprof.typepad.com/taxprof_blog/2020/10/the-irs-is-outgunned.html

Tax, Tax News | Permalink

Comments

If you really, really, really, want tax reform, there's only one answer - SIMPLY THE TAX CODE.

* Tax corporations on GAAP profits.
* No capital gains taxation (meaning losses are fully deductible)
* No "below the line" deductions or credits for individuals. AGI = Taxable Income.
* No exemptions.
* Only filing status is individual.
* No estate tax. No step up in basis at death.
* Maybe three brackets 5%, 15%, 25%.

Stop using the Tax Code for social engineering experiments. If Congress wants to subsidize something like groovy energy, they need to cut checks and send them out the front door.

Of course, this will never happen. Think about how much Congress would lose in political contributions.

Posted by: Dale Spradling | Oct 6, 2020 7:34:27 AM

What do the wealthy "owe"?

Someone give me a number and a rationale. Last time I checked, the top 20% of households subsidize the entire federal government on a net tax basis.

Posted by: MM Classic | Oct 6, 2020 8:54:33 PM

If capital gains aren't to be taxes, then capital losses shouldn't be allowed to be deducted! Otherwise you are going to have tax avoidance rackets galore.

Posted by: Nathan Redshield | Oct 8, 2020 10:34:37 AM

Those who are indifferent to the underfunding of the IRS might consider this:

"Perhaps the consummate irony is that a country whose creation centered on the revolt of ordinary people against tax injustice — the Boston Tea Party — now tolerates paying an involuntary subsidy to support tax avoidance by our highest-paid citizens."

Read all about it in "Trump's Tax Avoidance is a Tax on the Rest of Us": https://www.nytimes.com/2020/09/30/opinion/trump-taxes.html

Posted by: Gerald Scorse | Oct 10, 2020 12:10:27 PM

Gerald:

I believe that opinion is from the same newspaper that apologized for running an op-ed by a sitting U.S. Senator, and then recently ran an op-ed by the PRC's enforcer in Hong Kong justifying the crackdown on pro-democracy protests.

P.S. Ordinary Americans aren't subsidizing "tax avoidance" by the upper class. The top 20% of U.S. households actually subsidize the bottom 60% when it comes to government transfers. That's a fact, not an opinion.

Posted by: MM Classic | Oct 10, 2020 8:17:07 PM

@Nathan, I should clarify. I meant capital gains should be taxed as ordinary income. Accordingly, capital losses should be fully deductible.

Posted by: Dale Spradling | Oct 11, 2020 5:22:23 AM

"That 'tax gap' corresponds to nearly 3 percent of GDP annually."

I'll also point out that the tax gap as calculated by the IRS based on the most recent years has barely changed since the 1990s. It was probably higher during the Clinton years when the IRS budget was bigger, and it's probably lower now during the Trump years after numerous deductions were capped or eliminated.

I'd love to see a rational argument from anybody who thinks the tax gap will ever go away, considering the main reasons it exists is non-filing and under-paying, not under-reporting.

Posted by: MM Classic | Oct 13, 2020 7:38:12 PM