Tax avoidance for high incomes much higher than previously thought, new estimates on paper

These strategies include tax evasion abroad, which may have diminished after stricter information requirements came into effect about a decade ago. But many high-income Americans also use associations and similar entities to avoid taxes, and this behavior can increase and be harder to find and unclog for tax authorities, said Daniel Reck of the London School of Economics, lead author non-governmental nature of the document.

These transactional companies (where income goes directly to their owners ’individual tax returns and are not taxed at the corporate level) are an important and increasingly important part of the wealth of the top 1%, especially 0.1%. % higher. Mutual funds, real estate firms, and close family businesses in all industries are often structured as partnerships.

“There’s more revenue than you might have thought at the top,” Reck said. “What is needed is a broader strategy that involves higher control of transport companies [and] investments in the comprehensive audits that the IRS does in its global wealth program. “

IRS Commissioner Charles Rettig made a brief reference to the investigation, scheduled for publication Monday, as a working paper by the National Bureau of Economic Research, in congressional testimony last week , while urging lawmakers to give the agency more money for its implementation.

“It doesn’t just count the number of people we have running,” said Rettig, who argued that every extra dollar invested in tax execution could generate revenue of $ 5 to $ 7. “We need to have specialized agents.”

Research on tax evasion can be difficult and inaccurate because it requires seeing what has been intentionally hidden. The paper stresses that more work is needed to measure tax compliance by high-income Americans. Authors include John Guyton and Patrick Langetieg of the IRS, Max Risch of Carnegie Mellon University, and Gabriel Zucman, an economist at the University of California, Berkeley, who has advocated an annual wealth tax.

IRS audit rates and control staff have steadily declined over a decade amid budget cuts, some from government-wide cuts and others focused on the IRS after the agency said it had given some conservative groups improper control. President Biden and other Democrats have proposed reversing this trend with a major expansion of the U.S. tax agency.

The most ambitious proposals include estimates that a strengthened IRS, armed with more people and tougher rules that require more financial information from companies, could raise an additional $ 1 trillion over a decade without raising taxes. Some Republicans have shown their recent openness to expanding the IRS budget, but Democrats have yet to try to move forward on far-reaching proposals.

Using internal IRS tax return data, the researchers examined people who revealed offshore accounts about a decade ago, when the IRS encouraged people to come forward in exchange for more lenient treatment. They found that hundreds of them had been chosen years before their disclosure for random audits that the IRS uses to measure tax evasion, and that IRS auditors found offshore accounts only 7%. of time.

For passenger companies and complex partnerships, the researchers assumed default rates between those of large companies and those of sole proprietors, both areas where the IRS has better data than in those random audits it uses for purposes of transaction research. This led to higher avoidance projections than previous IRS methods.

Research is an important contribution to understanding tax evasion and should strengthen calls to give more resources to the IRS, said Jason DeBacker, a professor at the University of South Carolina who has written separately on the subject. .

However, he said some of the results are based on assumptions about business to convey that are reasonable but less specific than how another evasion is measured.

“They are not so clear about an approach to identifying what [IRS] faults for passive income, as for offshore income, “DeBacker said in an email.

Write to Richard Rubin to [email protected]