FacebookTwitterGoogle+RedditEmail

Does Self-Reporting Drive the $385 Billion ‘Tax Gap’?

The real divide in U.S. incomes isn’t between the top 1 percent and the other 99 percent. It’s between those whose income is reported by their employers to the Internal Revenue Service, and those who self-report. The divide is costing the Treasury about $200 billion a year, and Congress should gradually phase it out.

Tax compliance studies have consistently linked self-reporting with Treasury shortfalls. The link was underscored early this year when the IRS released its latest estimate of the nation’s “tax gap”—the difference between true tax liabilities and what the Treasury receives. The IRS put the gap at $385 billion, with more than half stemming from unreported work income.

Here’s the key statement from the IRS summary of the new gap numbers: “For example, the net misreporting percentage for amounts subject to substantial information reporting and withholding is 1%; for amounts subject to substantial information reporting but no withholding, it is 8%; and for amounts subject to little or no information reporting, such as business income, it is 56%.”

Think for a moment about an income misreporting percentage of 56%. It means that taxpayers with incomes “subject to little or no information reporting” are paying, on average, less than half what they should be paying. The better part of the tax gap comes from assuming that human beings will act like angels when they self-report their work income. (True, there’s always the chance of an IRS audit. But odds are there won’t be any audit, and thousands of taxpayers are obviously playing the odds.)

The new gap totals should impel Congress to beef up income verification. Any such move, of course, would generate fierce resistance. Economist Bruce Bartlett held top posts under presidents Reagan and George H.W. Bush and now blogs for a major daily. His remarks on the IRS data touched on the obstacles to reporting reform: “People don’t like the intrusion into their privacy—and the diminution of their opportunities for tax evasion—and businesses don’t like the cost or the alienation of their customers.”

The straight up answer to all such complaints comes from 2008 GOP presidential candidate John McCain: “Country First”. Fiscal prudence, national togetherness and tax fairness all argue powerfully for less porous reporting rules.

The billions that lose their way to the Treasury will likely increase the federal deficit, leaving a hard choice. We can raise taxes, or go without the societal benefits that $385 billion would buy.  We could also stem the leakage. The nation and all taxpayers benefit from income reporting for wages and salaries. The nation would also benefit, and it would only be fair, if information reporting could become the norm for current honor system tax filers—self-employed professionals, small business owners, landlords and others.  As Bartlett wrote, “It’s unfair to honest taxpayers and undermines tax morale when large numbers of people and businesses don’t pay their taxes.”

President Obama’s State of the Union address called for an America where “everyone does their fair share, and everyone plays by the same set of rules.” A current example on Wall Street shows that income reporting rules can move closer to that goal, and even gain bipartisan backing.

This is year two of the three-year phasing in of new rules for reporting capital gains. Proceeds from the sale of stocks and mutual funds were formerly reported to the IRS, but not the purchase price, called the basis. Since capital gains can’t be verified without knowing the basis, it was easy for taxpayers to misreport their investment income. Basis reporting began as the initiative of former Senator Evan Bayh (D-IN). It became a bipartisan bill when Bayh convinced fellow fiscal hawk Sen. Tom Coburn (R-OK) to sign on. The Bush Administration later added its endorsement.

The reasons for basis reporting of capital gains apply many times over to information reporting of work income. The Treasury’s loss is far greater, as are the potential gains to taxpayers from simplified record-keeping and tax preparation. Businesses, for example, could have bank accounts with deposits coded as income and checks coded as expenses. At year’s end, banks could report the totals to businesses and to the IRS—and begin making business income reporting almost as simple as wage and salary income reporting (and much closer in tax compliance as well).

“Trust, but verify” became President Reagan’s trademark phrase during his Cold War nuclear negotiations with Russia. America’s foe today is a mammoth deficit coupled with a $385 billion tax gap. Congress could slash the gap by slowly but surely bringing self-reporting taxpayers into a “trust but verify” system. Ronald Reagan would approve.

Gerald E. Scorse helped pass the basis reporting bill. He writes articles on taxes.

More articles by:

December 17, 2018
Susan Abulhawa
Marc Lamont Hill’s Detractors are the True Anti-Semites
Jake Palmer
Viktor Orban, Trump and the Populist Battle Over Public Space
Martha Rosenberg
Big Pharma Fights Proposal to Keep It From Looting Medicare
David Rosen
December 17th: International Day to End Violence against Sex Workers
Binoy Kampmark
The Case that Dare Not Speak Its Name: the Conviction of Cardinal Pell
Dave Lindorff
Making Trump and Other Climate Criminals Pay
Bill Martin
Seeing Yellow
Julian Vigo
The World Google Controls and Surveillance Capitalism
ANIS SHIVANI
What is Neoliberalism?
James Haught
Evangelicals Vote, “Nones” Falter
Vacy Vlanza
The Australian Prime Minister’s Rapture for Jerusalem
Martin Billheimer
Late Year’s Hits for the Hanging Sock
Weekend Edition
December 14, 2018
Friday - Sunday
Andrew Levine
A Tale of Two Cities
Peter Linebaugh
The Significance of The Common Wind
Bruce E. Levine
The Ketamine Chorus: NYT Trumpets New Anti-Suicide Drug
Jeffrey St. Clair
Roaming Charges: Fathers and Sons, Bushes and Bin Ladens
Kathy Deacon
Coffee, Social Stratification and the Retail Sector in a Small Maritime Village
Nick Pemberton
Praise For America’s Second Leading Intellectual
Robert Hunziker
The Yellow Vest Insurgency – What’s Next?
Patrick Cockburn
The Yemeni Dead: Six Times Higher Than Previously Reported
Nick Alexandrov
George H. W. Bush: Another Eulogy
Brian Cloughley
Principles and Morality Versus Cash and Profit? No Contest
Michael F. Duggan
Climate Change and the Limits of Reason
Victor Grossman
Sighs of Relief in Germany
Ron Jacobs
A Propagandist of Privatization
Robert Fantina
What Does Beto Have Against the Palestinians?
Richard Falk – Daniel Falcone
Sartre, Said, Chomsky and the Meaning of the Public Intellectual
Andrew Glikson
Crimes Against the Earth
Robert Fisk
The Parasitic Relationship Between Power and the American Media
Stephen Cooper
When Will Journalism Grapple With the Ethics of Interviewing Mentally Ill Arrestees?
Jill Richardson
A War on Science, Morals and Law
Ron Jacobs
A Propagandist of Privatization
Evaggelos Vallianatos
It’s Not Easy Being Greek
Nomi Prins 
The Inequality Gap on a Planet Growing More Extreme
John W. Whitehead
Know Your Rights or You Will Lose Them
David Swanson
The Abolition of War Requires New Thoughts, Words, and Actions
J.P. Linstroth
Primates Are Us
Bill Willers
The War Against Cash
Jonah Raskin
Doris Lessing: What’s There to Celebrate?
Ralph Nader
Are the New Congressional Progressives Real? Use These Yardsticks to Find Out
Binoy Kampmark
William Blum: Anti-Imperial Advocate
Medea Benjamin – Alice Slater
Green New Deal Advocates Should Address Militarism
John Feffer
Review: Season 2 of Trump Presidency
Rich Whitney
General Motors’ Factories Should Not Be Closed. They Should Be Turned Over to the Workers
Christopher Brauchli
Deported for Christmas
FacebookTwitterGoogle+RedditEmail