Topline
In a Wednesday report, the Treasury Department stated that the richest Americans are evading taxes in excess of hundreds of billions of US dollars each year. The findings were used by the Treasury Department to support a $80 billion investment to improve tax enforcement at the Internal Revenue Service.
Over the next decade, the nation's tax gap will reach $7 trillion. Getty Images
The Key Facts
The Treasury report shows that the top 1% of taxpayers ranked according to income failed to pay $163 billion in taxes last tax year. This represents 28% of total unpaid taxes. Meanwhile, the top 5 percent failed to pay $307 billion or almost 53% of the total sum. The Treasury estimates that the total underpayment of $600 billion will result in $7 trillion in lost tax revenue over 10 years. This is a "stretched" sum of roughly 3% GDP or all taxes paid by the bottom 90%. According to the Treasury, the majority of tax evasion is caused by the wealthy Americans. This is because they have access to tax preparers and accounts that help them avoid their income tax liability. The Treasury also attributes part the "striking tax gap" to the absence of reporting requirements for "opaque income sources" commonly used by high-earners, with up to 55% of noncompliance resulting from partnerships, proprietorship, and rental income.
Important Quote
The report was written by Natasha Sarin, Treasury Department's Director of Taxation. She stated that the United States has less tax revenue than ever before as a percentage [of gross domestic product]. This is partly due to the significant amount of owed but not collected taxes. These unpaid taxes force policymakers to choose between increasing deficits, spending less on key priorities, and further tax increases to make up for the lost revenue. This will only be possible if compliant taxpayers are able to pay.
What to Watch
Greater tax enforcement. President Joe Biden's Administration proposed to increase the IRS budget by $80 Billion over the next 10 year in order to generate $320 billion in tax collection over that period. However, lawmakers eventually scrapped the plan in a bipartisan compromise. It also proposed tax reporting requirements for financial institutions in order to audit "sophisticated tax avoiders." Over the next ten years, the administration anticipates that the audits will generate $460 billion more.
Contra
Last week, the Congressional Budget Office stated that the enforcement plans of the Biden administration would only generate about $200 billion more revenue. According to the agency, some taxpayers will adjust to the increased enforcement activities by finding new ways to evade detection. This could result in lower expected returns over the next few years.
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