How to Increase Tax Revenue Without Increasing Tax Rates
A recent article in The New York Times tackled the challenge of how the federal government can pay for its list of to-do items, such as nationwide infrastructure updates, investing in clean energy, ensuring every American has access to affordable health care and paying down the massive $28.1 trillion in debt.1 The recommendation was simple: Don’t raise individual or corporate taxes — just collect was is owed under current rules and legislation.
Historically, individual filers with annual incomes equaling more than $1 million tended to experience higher-than-average audit rates — at least that was true from 2010 through 2015.2 However, due to IRS spending cuts, the tax audits of millionaires have dropped by 50% since 2010, with fewer corporate tax audits as well.
Meanwhile, a 2019 study discovered that taxpayers in poorer parts of the country are more likely be audited than taxpayers living in wealthier counties. In fact, eight of the 10 most audited counties in the U.S. were in Mississippi. The study found that auditors were specifically targeting taxpayers who claimed the Earned Income Tax Credit.3
While we do not advocate for clients avoiding their income tax obligation, we can make recommendations to help make the most of tax-efficient strategies to retain more income while helping secure your financial future. If you’d like to learn more, please give us a call.
When it comes to individual taxes, the IRS has established a standard means of reporting income that makes it easier to identify fraudulent claims or under-reported income. Employers submit an annual W-2 for each employee and 1099 forms for other types of work-for-hire income. As a result, more than 95% of wage income is accurately reported to the IRS each year.4
That doesn’t include everyone, though. A new report found that the top 1% of high-net U.S. households report only about 80% of their income. These households may use strategies such as transferring earnings directly to offshore accounts, which is not only illegal in the U.S. but hard to detect via an audit. Some use partnerships, blind trusts and anonymous limited-liability companies to hide assets — sometimes jumping through a legal loophole, sometimes not.5
However, the biggest revenues are lost from unreported income by corporations. Presently, there is no checks-and-balances system, such as a W-2 or 1099, to track the income earned by companies large or small. It is reported that billions of dollars in business profits are not claimed on corporate tax returns each year, an amount projected to reduce legitimate federal tax revenues by as much as $600 billion this year and more than $7.5 trillion throughout the next decade. At the current low corporate tax rate, those revenues represent more than half of the projected federal deficit in the same period.6
The New York Times editorial board observed that the IRS needs a verification process, much like employers provide for individual taxpayers. For example, banks could be required to generate an annual account statement for individual company inflows and outflows. This is the type of tax form that investment firms produce for their clients in January each year.7
Therefore, there are two ways the federal government (and, by extension, state governments) could increase tax revenues without having to increase individual or corporate tax rates:
- According to current IRS Commissioner Charles Rettig, allocating more funding and resources for IRS tax enforcement could yield up to $7 in tax revenues per $1 spent.8
- Developing a uniform reporting standard to verify business income would help increase tax revenues without actually having to increase tax rates.
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1 Erin Duffin. Statistica. March 5, 2021. “Public debt of the United States of America from February 2020 to February 2021, by month.” https://www.statista.com/statistics/273294/public-debt-of-the-united-states-by-month/. Accessed March 23, 2021.
2 Sunita Lough. IRS. Oct. 20, 2020. “IRS audit rates significantly increase as income rises.” https://www.irs.gov/about-irs/irs-audit-rates-significantly-increase-as-income-rises. Accessed March 23, 2021.
3 Brentin Mock. Bloomberg. April 3, 2019. “IRS Audits Target the Wealth Depleted Southern Black Belt.” https://www.bloomberg.com/news/articles/2019-04-03/map-reveals-more-irs-audits-in-southern-black-belt. Accessed April 14, 2021.
4 The Editorial Board. The New York Times. March 20, 2021. “How to Collect $1.4 Trillion in Unpaid Taxes.” https://www.nytimes.com/2021/03/20/opinion/sunday/unpaid-tax-evasion-IRS.html. Accessed March 23, 2021.
5 John Guyton, Patrick Langetieg, Daniel Reck, Max Risch and Gabriel Zucman. National Bureau of Economic Research. March 2021. “Tax Evasion at the Top of the Income Distribution: Theory and Evidence.” https://www.nber.org/system/files/working_papers/w28542/w28542.pdf. Accessed April 14, 2021.
6 The Editorial Board. The New York Times. March 20, 2021. “How to Collect $1.4 Trillion in Unpaid Taxes.” https://www.nytimes.com/2021/03/20/opinion/sunday/unpaid-tax-evasion-IRS.html. Accessed March 23, 2021.
8 David Lawder. Reuters. March 18, 2021. “IRS chief says increase in enforcement budget would boost tax collection.” https://www.reuters.com/article/us-usa-tax/irs-chief-says-increase-in-enforcement-budget-would-boost-tax-collection-idUSKBN2BA2R2. Accessed April 14, 2021.
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