Conservatives Say Breaking the Law is Normal for Rich People at Tax Time

Any tax system that subjects rich people to high taxes is asking for trouble. Or so the politicians who cater to people of means incessantly argue. The higher the tax rate on high incomes, the argument goes, the greater the incentive the rich have to waste time and energy figuring out ways to evade paying taxes.

“Conservatives tend to talk about noncompliance as if it were solely a function of tax rates,” as former Reagan administration policy aide Bruce Bartlett noted last week, a perspective that makes tax evasion “yet another excuse to cut taxes.” 

In 2001 and then again in 2003, that convenient excuse helped the Bush White House chop away at the taxes the IRS expects rich people to pay. The tax rate on top tax-bracket income slipped from 39.6 to 35 percent, and the rates on capital gains and dividends both dropped to 15 percent, from 20 and 39.6 percent.

According to rich people-friendly right-wing ideology, these cuts should have boosted tax compliance, since, as Bartlett points out, “the return to evasion fell.”

What did happen? Tax evasion between 2001 and 2006, a new IRS study documents, actually increased. In 2001, $290 billion in individual and business taxes due went uncollected. In 2006, $385 billion.

Need some context for all these billions? The 2006 federal budget deficit red ink totaled $248 billion. If the IRS had been able to collect every dime cheating taxpayers cost Uncle Sam in 2006, the federal treasury would have ended the year $137 billion in the black.

Who’s doing all this tax cheating? Not average Americans.

Average Americans get most of their income from wages and salaries. Almost all this income faces paycheck withholding. The result: Only 1 percent of the taxes due on wages and salary, the new IRS study reports, goes uncollected.

Rich Americans, by contrast, collect huge chunks of their annual income from capital gains, business ownership, and other sources of income that face neither rigorous reporting mandates or withholding.

Tax evasion for the income category that includes capital gains and private equity partnerships, the IRS calculates, ran at an 11 percent rate in 2006, ten times the evasion rate for wages and salaries.

The new IRS report doesn’t break down the new tax evasion data by taxpayer income class. But five years ago, the last time the IRS released a major tax evasion analysis, two analysts — IRS economist Andrew Johns and the University of Michigan’s Joel Slemrod — went through the raw IRS data and did just that.

Americans who make between $500,000 and $1 million a year, the pair found, underreport their incomes by a whopping 21 percent, triple the 7 percent “misreport” rate of taxpayers making between $30,000 and $50,000 and well over double the 8 percent cheating by taxpayers making $50,000 to $100,000.

The new IRS tax evasion numbers cover the 2006 federal fiscal year. Has the tax evasion story improved since then? Some signs certainly do seem positive.

Earlier this month, the IRS announced that audit rates on tax returns reporting over $1 million a year in income have doubled over recent years. In 2011, 12 percent of millionaires faced audits, up from only 6 percent in 2009.

The higher audit rates, says IRS enforcement chief Steven Miller, should assure “those at the lower end of the spectrum” that “those at the higher end of the spectrum are subject to the same rules and enforcement as everyone else.”

And the IRS is toughening up elsewhere as well. The agency has created a “Global High Wealth” unit, an initiative designed “to better cope with the growing complexity of income and assets of the high-income, high-wealth population.”