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Cheating Uncle Sam

By Sam Pizzigati, Too Much: A Commentary on Excess and Inequality. Posted October 29, 2008.


America's tax cheats come disproportionately and overwhelmingly from the ranks of America's rich.

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Back in 2005, IRS officials released a major new report on the "tax gap," the difference between what Americans owe in federal income tax and what they actually pay. The next year, an IRS update to the data in the original analysis put that gap at a stunning $345 billion a year.

But left unclear in this IRS data dump: Who exactly is cheating at tax time?

Now we know.

America's tax cheats, says an analysis of IRS data that surfaced last week, come disproportionately and overwhelmingly from the ranks of America's rich.

Americans who make between $500,000 and $1 million a year underreport their incomes by a whopping 21 percent. That's triple the 7 percent "misreport" rate of taxpayers who make between $30,000 and $50,000 and well over double the 8 percent cheating rate by taxpayers between $50,000 and $100,000.

The raw data behind all these stats originated in the IRS tax gap research, an undertaking that examined 45,000 randomly selected returns from 2001. In the paper that went public last week, two analysts -- IRS economist Andrew Johns and the University of Michigan's Joel Slemrod -- have broken the data from this massive audit effort down by income level.

The IRS original reports on the 2001 "tax gap" data included no income-level analysis. The IRS did release data, in these reports, on the categories of income that go underreported, data that help explain the new finding that the wealthy do most of the nation's tax cheating.

Average Americans get most of their income from wages, salaries, and tips. Only 1 percent of this income goes unreported, IRS investigators found in their original research.

Rich Americans, by contrast, collect huge chunks of their annual income from capital gains and business ownership. Business income went unreported by 43 percent in 2001, capital gains by 12 percent.

The newly published income-level analysis from Joel Slemrod and Andrew Johns does offer up one head-scratcher of a stat: America's very richest -- those who make over $1 million a year -- show lower cheating rates than taxpayers in the $500,000 to $1 million range. But Slemrod told Forbes last week that he's not particularly "comfortable" with that finding.

The super rich, the Michigan economist went on to explain, were likely exploiting tax shelters in 2001 that the later IRS audits simply did not detect.

Indeed, Forbes points out, the federal government is now suing the Swiss banking giant UBS "for the names of 18,000 wealthy Americans it believes may have had unreported Swiss bank accounts."

So what do the new tax cheating numbers, in the end, tell us about the contemporary United States? The United States has become even more top-heavy than the best of the official inequality statistics would have us believe. The best stats use income data from tax returns. These returns, last week's revelations help us understand, don't tell the full story.

The rich, in other words, are grabbing off substantially more of the nation's wealth than we ever imagined.

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See more stories tagged with: taxes, tax cuts, wealthy, tax cheats

Sam Pizzigati is the editor of the online weekly Too Much, and an associate fellow at the Institute for Policy Studies.

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View:
That the “rich” evade taxes, the "poor" commit welfare fraud
Posted by: Libertarian Paternalist on Oct 29, 2008 1:25 PM   
Current rating: 1    [1 = poor; 5 = excellent]
That the “rich” evade more taxes is no surprise. As there is little surprise that welfare fraud is much higher among low income persons.

The more unfair a tax system seems the less willing to pay taxes you become. I come from Sweden and we had the highest marginal taxes in the world before 1990. In some cases small business owners could pay 105 % of earned income in taxes. As a consequence the Swedish national pastime in those days was tax avoidance and tax evasion. After the reform tax avoidance virtually disappeared, as did most of the tax evasion. (You cannot however get rid of tax evasion it will always be there no matter how low the taxes are.) during the Swedish banking crisis the taxes were raised again and as a result tax avoidance rose to higher levels than ever, Sweden’s high earners felt that the taxes had become punitive and unfair.

In a political system were a majority of 51 % can confiscate the other 49 % taxes it is very important that taxes are considered fair by the ones paying the taxes. Fairness is not in the eye of those that are recipient of the redistributive aspects of those same taxes. Especially if the ones tax is a minority of 10 %.

The rhetoric on taxes in the US today is strange. Never before in modern times has the “rich”, top 10 % of income earners paid such a large proportion of all taxes, 60 %. (Top 1 % pays 1/3 of taxes). To say that the top 10 %, “rich”, does not pay enough is pure demagoguery, populism.

Personally, I do not belong to the top 10 % myself, believe that taxing the top 10 % for political and financial expediency is a bad idea. People shouldn't be punished for being successful, and they already pay most of the tax burden.

The message of Sens. Barack Obama and Joe Biden is a push-back to the myth that the tax cuts championed by Bush were for the well-off. The nonpartisan National Center for Policy Analysis disputed that idea in a report earlier this year.

"It is politically popular to say that tax cuts benefit the wealthy," said Michael D. Stroup, a Stephen F. Austin University economist who authored the NCPA report. "The accusation does not match the reality."


In my opinion America doesn't need policies that take more money from one group of citizens and give it to another. We need leaders who will cut spending and live within a budget. It's what most of us do, and we should expect the same of our government.

________________________________________

Here are some of the underreported findings from the NCPA report:

• The top 1 percent of income earners pay more than $1 in every $3 the Internal Revenue Service collects; from 1986 to 2004, the total share of the income tax burden paid by the top 1 percent of earners grew from 25.8 to 36.9 percent, while the total share of the tax burden paid by the bottom half of earners fell from 6.5 to only 3.3 percent.

• During the same period, the percentage of income the top 1 percent of tax filers paid in federal income taxes rose from 18.3 to 19.6 percent; by contrast, the percentage of income the bottom fifth of tax filers paid in federal income taxes dropped from 0.4 percent to zero.

• The income share of the top 1 percent rose 7.7 percentage points, from 11.3 to 19 percent, while their income-tax burden rose by 11 points, from 26 to 37 percent.

The study is backed up by data from Congress' Joint Committee on Taxation:

• In 2006, 53.7 percent of federal income taxes were paid by those with incomes of more than $200,000. Those earning between $100,000 and $200,000 paid 28.3 percent of individual income taxes.

• Added up, those with incomes of more than $100,000 paid 82 percent of the total.

• They also paid 44.4 percent of payroll taxes.

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