Opinion | The I.R.S. Is Outgunned – By Natasha Sarin – The New York Times

By 

Dr. Sarin is an assistant professor at Penn Law and the Wharton School of Business.

Credit…Al Drago for The New York Times

“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. Even if all taxpayers were equally likely to evade their liabilities, the benefits to the top 1 percent from underpaying would still be significant: 1 percent of this $7.5 trillion, or $75 billion. But the top 1 percent share of the tax gap is at least 30 times this amount, more than $2 trillion in the coming decade.

To understand this magnitude, consider this: If the I.R.S. were able to collect the unpaid taxes that the top 1 percent owe — absent any increases in top tax rates or new system of wealth taxation — enough revenue would be generated to wipe out student debt for most people in this country.

Why are the wealthy skirting the tax laws most aggressively? It’s a feature of our tax collection system. Compliance rates for ordinary wage and salary workers are 99 percent because their taxes are automatically withheld. In contrast, richer Americans are more likely to have items like capital gains, rental income and proprietorship income — and the I.R.S. estimates that up to 55 percent of the income from such sources can be unreported, and thus untaxed.”