Biden Seeks a Robust Attack on the Tax Gap
The US Treasury Department released a report today on the Case for a Robust Attack on the Tax Gap
A well-functioning tax system requires that everyone pays the taxes they owe. Today, the “tax gap”—the difference between taxes that are owed and collected—totals around $600 billion annually and will mean approximately $7 trillion of lost tax revenue over the next decade.
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.
Estimates from academic researchers suggest that more than $160 billion lost annually is from taxes that top 1 percent choose not to pay.
The Administration’s proposals call for significantly increasing the IRS budget, specifically $80 billion of investment over the coming ten years in enforcement, IT, and taxpayer services generating an estimated $320 billion in additional tax collections over the next ten years.
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.
It also needs access to information about opaque income streams—like proprietorship and partnership income—that accrue disproportionately to high-earners.
Changes to the third-party information reports are estimated to generate $460 billion over a decade.
Once the overhaul of the IRS is complete, these proposals combined will generate even more revenue: an estimated $1.6 trillion in additional tax revenue, just from improved collection of the taxes that are already due.
Projected Revenue and Expenses
- $163 billion the taxes that top 1 percent choose not to pay annually.
- $320 billion in additional tax collections over the next ten years from more IRS agents ($32 billion annually)
- $460 billion over a decade with changes to third-party information ($46 billion annually)
- $80 billion of investment over the coming ten years in enforcement (minus $8 billion annually).
- An estimated $1.6 trillion in additional tax revenue, just from improved collection of the taxes that are already due. This is "just because" unexplained double counting.
Annual Total As Presented
$163 Billion + $32 Billion + $46 Billion - $8 Billion = $233 Billion
Even if you fator in an extra "just because" $1.6 trillion over a decade (an additional $160 billion annually) that total is still only $393 billion annually.
Annual Magic Total
$163 Billion + $32 Billion + $46 Billion - $8 Billion ≈ $600 Billion
10-Year Magic Total
$233 * 10 ≈ $7 Trillion
Those are the totals presented. I read the report multiple times to see what was missing and concluded: I am missing the Magic Brain Trust.
Unfortunately, I am serious.
Tax Evasion ‘Brain Trust’ Magic
Please consider a Millennial Economist Helps Power a Tax Evasion ‘Brain Trust’
Shrinking the $7 trillion so-called tax gap has long been an aspiration for policymakers and scholars, but it is taking on new urgency as the Biden administration looks to win bipartisan support for its infrastructure proposal.
The number crunching behind this work is taking place at the Treasury Department, where Secretary Janet L. Yellen has created a team to tackle the issue and staffed the agency with economists and others who have spent years studying how the government can hunt down money that it is owed but fails to collect.
The group, known internally as the “compliance brain trust,” includes four members of Treasury’s career staff along with Kimberly A. Clausing, deputy assistant secretary for tax analysis, and Natasha Sarin, a 32-year-old Harvard-trained economist who has written extensively on closing the gap.
“The proposal, which is sold under the guise of trying to close the tax gap, is very concerning and pulls almost all taxpayers into a surveillance dragnet,” Senator Mike Crapo of Idaho, the top Republican on the Senate Finance Committee, told Ms. Yellen at a hearing this week. “My concerns are amplified by the egregious apparent leak of private taxpayer information out of the I.R.S.”
Five former Treasury secretaries — Mr. Summers, Timothy F. Geithner, Jacob J. Lew, Henry M. Paulson Jr. and Robert E. Rubin — wrote in a New York Times opinion essay this month that the Treasury Department’s revenue projections were modest and pointed to another estimate that said the I.R.S. could recover $1.6 trillion over a decade.
More Magic Math
Clearly these five former Treasury Secretaries noted above cannot do basic math. I can help.
$1.6 Trillion ≈ $7 Trillion
More Math Lessons Needed
The New York Times reported earlier today the Top 1 Percent are Evading $163 Billion a Year in Taxes, the Treasury finds.
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.
Democrats are counting on raising money by collecting more unpaid taxes to help pay for the $3.5 trillion spending package they are drafting.
The Treasury Department estimates that its tax gap proposals could raise $700 billion over a decade.
What's with these people? Somehow we are down to $700 billion over a decade.
Checking in With the CBO
The nonpartisan Congressional Budget Office reports on the Effects of Increased Funding for the IRS.
CBO estimates that portions of the Administration’s proposal to increase funding for the IRS by $80 billion over the 2022–2031 period would increase revenues by approximately $200 billion over those 10 years. That estimate does not include changes in revenues resulting from portions of the proposal that involve new information-reporting requirements and other changes to the tax code; those changes are estimated by the staff of the Joint Committee on Taxation (JCT).
CBO’s estimate of revenues is based on the IRS’s projected returns on investment (ROIs) for spending on new enforcement initiatives. The IRS estimates those ROIs by calculating the expected revenues that would be raised from taxes, interest, and penalties as a result of the new initiatives and dividing them by their additional cost.
The CBO assumes the total revenue increase is a mere $120 billion spread over 10 years.
- Brain Trust Proposal: ≈ $7 Trillion
- Brain Trust Actual Numbers Totaled: $2.33 Trillion
- Five Former Treasury Secretaries: $1.6 Trillion
- New York Times Estimate of the Report: $700 Billion
- CBO Estimate: $120 Billion
What's Going On?
In a nutshell, Biden needs to come up with numbers that will allow him to spend $3.5 Trillion.
To make it all work, the Magic Brain Trust concludes Biden's plan will bring in $7 trillion.
$7 Trillion Farce
The $7 trillion projection is a farce especially given the administration can only explain $2.33 trillion of it.
I suspect the answer is somewhere between the CBO's estimate of $120 billion and the $1.6 trillion estimate of five former treasury secretaries.
From a practical standpoint, taxes will rise to make up the difference or deficits will be far bigger than the Biden administration projects.
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