Wealthy households underpay their federal taxes by $600 billion annually, according to the Treasury Department’s new analysis of what’s known as the “tax gap.”
Most workers have federal income taxes automatically withheld from their paychecks, meaning the federal government has precise information about their earnings, but higher earners with more non-wage income can more easily avoid reporting it.
“Today’s tax code contains two sets of rules: one for regular wage and salary workers who report virtually all the income they earn; and another for wealthy taxpayers, who are often able to avoid a large share of the taxes they owe,” Natasha Sarin, the Treasury Department’s deputy assistant secretary for economic policy, said in a Wednesday blog post.
The top 1% of households “choose not to pay” more than $160 billion per year, Sarin wrote.
The Joe Biden administration released the analysis Wednesday as part of its push for tougher tax enforcement to offset the cost of a massive overhaul of the federal safety net that Democrats plan to push through Congress this fall. Biden has proposed $80 billion in additional funding for the Internal Revenue Service, which the Congressional Budget Office has said would yield $200 billion in additional revenue.
“For the IRS 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,” Sarin wrote. “It also needs access to information about opaque income streams ― like proprietorship and partnership income ― that accrue disproportionately to high-earners.”
Democrats have also proposed requiring financial institutions to file annual information returns detailing the amount of money coming into and out of bank accounts, which the administration says would raise another $400 billion. The extra information would help the IRS enforce the tax code but would also encourage more voluntary compliance, since people would know the government has a better notion of their income.
Sarin noted that the income tax noncompliance rate for wage income is only 1%, compared to as much as 55% for self-reported income sources from partnerships or proprietorships.
Banks and Republicans hate the information reporting proposal so much that lawmakers omitted any increased funding for IRS enforcement from a bipartisan infrastructure deal even though senators wanted to offset its cost as much as possible.
“This time-draining burden disregards banking privacy in order to squeeze more resources out of responsible Americans and entrepreneurs,” Sen. Mike Crapo (R-Idaho) said last month.
The Senate narrowly defeated a symbolic Crapo amendment to strip the proposed account reporting regime from a budget outline last month, but it’s one of several tax issues where some more conservative Democrats may sympathize with the proposal’s intended targets ― meaning it could get watered down or abandoned.
Republicans, for their part, prefer to lament fraud among recipients of low-income tax credits, even though tax credit beneficiaries already get audited more than most other taxpayers.
Raising new revenue is key for Democrats to enact their ambitious agenda of monthly child benefits, universal paid leave and affordable child care. Party leaders have said they want to offset the entire cost of their $3.5 trillion budget proposal, meaning they’ve set up a zero-sum situation where losing a dollar of revenue means losing a dollar toward making life easier for families who’d benefit from their proposals.
In its previous estimate of the tax gap, the Treasury Department estimated it missed out on $441 billion before enforcement efforts and late payments for tax years 2011 through 2013. Charles Rettig, the IRS commissioner, said earlier this year he thought the tax gap could be as much as $1 trillion annually.
Calling all HuffPost superfans!
Sign up for membership to become a founding member and help shape HuffPost’s next chapter
Need Your Help Today. Your $1 can change life.