Making Millionaires Pay Their Fair Share: Part 1 of 2

High-income tax cheats have stolen billions from the rest of us. The IRS is finally going after them. In the past few months, it has collected $38 million from about 175 high-income tax cheats, and that’s just a start. 

Chasing wealthy tax cheats takes more skill, time, and money than auditing low-income or middle-income taxpayers.  That’s why the Biden administration got more money for the IRS this year, and why the Republicans in Congress are howling about it and demanding that the IRS return to a starvation diet that will keep it from going after the big bucks. 

As a group, high-income earners deliberately hide far more of their income than lower-income earners. One study found that “under-reported income as a fraction of true income rises from about 7% in the bottom 50% of the income distribution to 21% in the top 1%.”  

Hiding income works, in part, because the top one percent use sophisticated schemes to hide income. But the other, and arguably more important, reason is that the IRS for years has audited poorer people more often than richer people. Poorer people have simpler returns and are easier to audit. 

The second reason that wealthy individuals—and corporations—can get away with evading taxes is that the IRS has been deliberately underfunded for years. Pro Publica reported back in 2018: 

“The cuts are depleting the staff members who help ensure that taxpayers pay what they owe. As of last year, the IRS had 9,510 auditors. That’s down a third from 2010. The last time the IRS had fewer than 10,000 revenue agents was 1953, when the economy was a seventh of its current size. And the IRS is still shrinking. …

“The IRS conducted 675,000 fewer audits in 2017 than it did in 2010, a drop in the audit rate of 42 percent. But even those stark numbers don’t tell the whole story, say current and former IRS employees: Auditors are stretched thin, and they’re often forced to limit their investigations and move on to the next audit as quickly as they can.…

“Corporations and the wealthy are the biggest beneficiaries of the IRS’ decay. Most Americans’ interaction with the IRS is largely automated. But it takes specialized, well-trained personnel to audit a business or a billionaire or to unravel a tax scheme — and those employees are leaving in droves and taking their expertise with them. For the country’s largest corporations, the danger of being hit with a billion-dollar tax bill has greatly diminished. For the rich, who research shows evade taxes the most, the IRS has become less and less of a force to be feared.

“The story has been different for poor taxpayers. The IRS oversees one of the government’s largest anti-poverty programs, the earned income tax credit, which provides cash to the working poor. Under continued pressure from Republicans, the IRS has long made a priority of auditing people who receive that money, and as the IRS has shrunk, those audits have consumed even more resources, accounting for 36 percent of audits last year.”

Remember—that’s 2018. Attrition at the IRS continued unabated until last year, when the Biden administration finally got an increase in funding.  Treasury Secretary Janet Yellen said the increase would help to “end the two-tiered tax system, where most Americans pay what they owe, but those at the top of the distribution often do not.” She ordered IRS agents to focus on high-end non-payers and cheats, and not to increase audits of businesses or individuals making less than $400,000 a year.

Predictably, Republicans opposed the increased funding for IRS audits. They have managed to roll back part of it already. 

Even if multi-millionaires simply pay what they owe, they will still not be paying what they should. Deductions, exemptions, lower tax rates on capital gains, tax shelters available only to those with a lot of money: these all combine to reduce the amount of income on which taxes are paid. But that’s not all: low marginal tax rates and inequitable rules on social security contributions are big factors in lowering taxes for high-income earners. More on that tomorrow …

For more, see:

Making Millionaires Pay Their Fair Share, Part 2

and

Making Millionaires Pay Their Fair Share: October 2023 Update