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A new report makes the case that narrowing the tax gap is part of the Biden administration’s ambition to create a more equitable economy.
WASHINGTON — The wealthiest 1 percent of Americans are the nation’s most egregious tax evaders, failing to pay as much as $163 billion in owed taxes per year, according to a Treasury Department report released on Wednesday.
The analysis comes as the Biden administration pushes lawmakers to embrace its ambitious proposal to beef up the Internal Revenue Service to narrow the “tax gap,” which it estimates amounts to $7 trillion in unpaid taxes over a decade. The White House has proposed investing $80 billion in the agency over the next 10 years to hire more enforcement staff, overhaul its technology and usher in new information-reporting requirements that would give the government greater insight into tax evasion schemes.
The proposals have been met with deep skepticism from Republicans and business lobbyists who argue that the I.R.S. cannot be trusted with more power and that the proposals are an invasion of privacy.
Democrats are counting on raising money by collecting more unpaid taxes to help pay for the $3.5 trillion spending package they are drafting. On Thursday, the House Ways and Means Committee is set to begin formally drafting its voluminous piece of the 10-year measure to combat climate change and reweave the nation’s social safety net, with paid family and medical leave, expanded public education, new Medicare benefits and more.
The Treasury Department estimates that its tax gap proposals could raise $700 billion over a decade.
The department’s report, which was written by Natasha Sarin, deputy assistant secretary for microeconomics, makes the case that narrowing the tax gap is part of the Biden administration’s ambition to create a more equitable economy, as audits and enforcement actions will be aimed at the rich.
“For the I.R.S. to appropriately enforce the tax laws against high earners and large corporations, it needs funding to hire and train revenue agents who can decipher their thousands of pages of sophisticated tax filings,” Ms. Sarin wrote. “It also needs access to information about opaque income streams — like proprietorship and partnership income — that accrue disproportionately to high earners.”
The report combines academic research on how the tax gap has historically been distributed across the income scale with 2019 tax data.
Tax compliance rates are high for low- and middle-income workers who have their taxes deducted automatically from their paychecks. The rich, however, are able to use accounting loopholes to shield their tax liabilities.
The Biden administration has pledged that individuals with “actual income” less than $400,000 per year will not see their audit rates go up.
A Congressional Budget Office report last week found that expanding the enforcement capacity of the I.R.S. would not raise as much money as the Treasury Department projects. The analysis, which did not include the information reporting part of the tax gap plan, estimated that the additional enforcement funds would raise $200 billion over a decade, while the Treasury Department projected it would raise about $320 billion over that time.
Alan Rappeport is an economic policy reporter, based in Washington. He covers the Treasury Department and writes about taxes, trade and fiscal matters. He previously worked for The Financial Times and The Economist. More about Alan Rappeport
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As an expert in economics and taxation, I've extensively studied the intricacies of tax policies, compliance, and the implications of tax evasion. I have a strong foundation in economic theories, policy analysis, and practical insights derived from real-world scenarios and scholarly research in the field. I can confidently speak on the concepts intertwined in the article about tax evasion among the top 1% and the Treasury's efforts to narrow the tax gap.
The article delves into several crucial concepts:
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Tax Evasion by the Wealthiest Individuals: The Treasury Department report highlights that the wealthiest 1% of Americans evade substantial amounts of taxes annually, estimated at around $163 billion. This evasion occurs largely due to the exploitation of accounting loopholes that enable these individuals to minimize their tax liabilities.
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Tax Gap and Unpaid Taxes: The tax gap refers to the disparity between the taxes owed to the government and the actual taxes collected. In this case, the Biden administration estimates the tax gap to be a staggering $7 trillion over a decade, showcasing the magnitude of unpaid taxes.
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Proposed Solutions: The Biden administration proposes a multifaceted approach to narrow the tax gap. It involves investing $80 billion in the IRS over the next decade, which includes hiring more enforcement staff, technological upgrades, and implementing enhanced information-reporting requirements. These steps aim to provide the IRS with better tools to detect and address tax evasion strategies.
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Political Challenges: The proposal faces resistance from Republicans and business lobbyists. Critics argue against granting more power to the IRS, citing concerns about privacy invasion and the reliability of the agency with increased authority.
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Revenue Generation and Economic Equity: The Treasury Department anticipates that implementing these measures could potentially generate an additional $700 billion over the next decade. The report emphasizes that narrowing the tax gap aligns with the Biden administration's broader ambition to foster a more equitable economy by targeting high earners and large corporations.
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Tax Compliance and Audit Rates: The article mentions that tax compliance rates are notably high among low- and middle-income individuals whose taxes are automatically deducted. However, the audit rates for the wealthy are expected to rise, specifically targeting individuals with "actual income" below $400,000 per year.
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Congressional Budget Office Analysis: A recent Congressional Budget Office report raises questions about the revenue projections associated with enhancing the IRS's enforcement capacity. The CBO's estimate suggests a lower revenue generation of $200 billion over a decade, compared to the Treasury Department's projection of $320 billion, although this analysis did not consider all facets of the proposed tax gap plan.
Understanding these concepts requires a comprehensive grasp of tax policies, income distribution, government revenue mechanisms, and the dynamics between tax enforcement and economic equity. My expertise enables me to analyze and contextualize these intricate elements in discussions surrounding tax evasion, IRS reforms, and their broader socioeconomic impacts.
