Richest 1% Responsible for 36% of Unpaid Federal Income Taxes
It’s no secret that some of America’s rich and famous go to great lengths to avoid reporting their total taxable income. A new working paper published by the National Bureau of Economic Research suggests that America’s top earners could be responsible for a significant amount of unpaid taxes due to the IRS — to the tune of $175 billion a year.
Unpaid Taxes by Wealthiest Americans Cost $175 Billion Every Year
Among the authors of the paper are John Guyton and Patrick Langtieg of the IRS Research, Applied Analytics, and Statistics department. Along with professors from Carnegie Mellon University, the London School of Economics and the University of California, Berkeley who co-authored the paper, Guyton and Langtieg used three approaches to determine the amount of money omitted by the top 1% of wealth holders in the United States.
Their research discovered that the highest earners in the United States are most likely to use technology, which may not necessarily be detected using traditional tax return audits, to hide their true wealth. This goes beyond creating foreign bank accounts in tax havens. Instead, the highest-value Americans use technology because, despite the expense, the cost to do so is “trivial” compared to their total income, and they likely think it a good investment knowing their wealth puts them at high risk of an audit.
“With this interpretation…we show that high-income people are then more likely to adopt positions in the ‘gray area’ between legal avoidance and evasion,” the researchers write. “From the point of view of the tax authority, we show theoretically that high resource costs of pursuing sophisticated forms of tax evasion, such as protracted litigation or more sophisticated audits of a complex network of closely-held businesses, can pose practical limits on the extent to which the tax authority can pursue these types of tax evasion by high-income people.”
Because these sophisticated networks are beyond what tax audits were designed to detect, the investigation team concluded that more tax revenue is lost at the top compared to other tax brackets.
“From a policy perspective, our results highlight that there is substantial evasion at the top which requires administrative resources to detect and deter,” the group writes. “We estimate that 36% of federal income taxes unpaid are owed by the top 1% and that collecting all unpaid federal income tax from this group would increase federal revenues by about $175 billion annually.”
Researchers Call for More Audits, With Deeper Investigations
To combat the loss of revenue collected by the government, the group suggests the IRS should do more than randomly audit the highest earners. Instead, the government should consider creating a whistle-blower program against the top earners, utilizing “specialized audit strategies like those pursued by the IRS’s Global High Wealth program and other specialized enforcement programs” and “investing in improved tools and increasing resources” to go after tax evasion at the top.
This isn’t the first time researchers suggested the government do more to collect the proper amount of tax from super-high earners. A working paper published by the NBER in 2020 suggested investing in new technology and expanding IRS agents’ ability to pursue evasion could yield as much as $100 billion in new revenue over the next decade.
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