5 takeaways:
➀ The “tax gap” between what American taxpayer owe and what they pay is $600 billion a year and worsening. Former U.S. Treasury Secretary Lawrence H. Summers blamed mass cuts in the Internal Revenue Service enforcement budget. Summers, joined by four fellow former Treasury secretaries, recently noted that the IRS has fewer auditors than at any time since World War II. Complicated tax returns, such as those for partnerships, zip through tax season with nary a second glance from auditors. “We have massively cut the IRS effort to enforce the tax law against the highest income tax payers over the last decade,” Summers said. “… In the face of this massive tax gap, rather than growing the IRS budget, we have been shrinking the IRS budget.”
➁ The tax gap measures taxes legally owed, not those avoided through legal means. The investigative journalism organization ProPublica in June 2021 published details about the paltry taxes paid by America’s wealthiest people. The blockbuster investigation — based on leaked data on individual tax returns — sparked a debate about the fairness of taxing income instead of wealth. Summers said he was “appalled by the breach of law and the leak of individuals’ tax returns” that powered ProPublica’s reporting but noted that it spotlighted legal tax avoidance. Taxes that are owed but not paid will grow to about $7.5 trillion over the next decade, he said. Collecting even small fraction of those would yield more than $1 trillion for the U.S. Treasury.
➂ The IRS spends its limited enforcement resources chasing small frauds rather than big ones. Even as its enforcement resources have dropped, the IRS has redirected its efforts from high income taxpayers to people with incomes so low that they qualify for the earned income tax credit. Indeed, audit rates for the top 1% of income earners are the same as for individuals who claim the EITC, according to research by Summers and others. One reason is that the IRS officials know that wealthy tax dodgers fight back with high-priced lawyers who can drag out enforcement actions. Auditing an EITC filer “is a lot easier than checking whether somebody’s interest and deductions are legitimate in the context of a complex partnership,” Summers said.
➃ IRS computers are seriously out of date. IRS has massive legal authority to go after tax cheats. But its information technology is so antiquated that it has trouble analyzing information it collects or sharing it among different divisions of the agency. In fact, the IRS is still using a computer language called COBOL that “was already a bit long in the tooth when I went to college in the 1970s,” Summers said. Congress has scrimped funding IT modernization for the IRS because “it’s a long-term investment” that “doesn’t show any results in the short run,” he said.
➄ Addressing the tax gap might garner bipartisan support in Congress, although that is far from certain. Summers sees “very substantial interest” among Democrats in tackling the tax gap, while some Republicans have shown a little interest in doing so. About two-thirds of necessary changes would require congressional action. President Joe Biden has included 10-year, $72.5 billion funding increase for the IRS in his fiscal 2022 budget, although its fate in Congress is unclear. “Many Republicans feel that the IRS can often be oppressive,” Summers said. “And just anything that smacks of higher taxes or people paying more taxes is something they don’t like. So I think the political prospect is not really very clear.”
Speaker: Lawrence H. Summers, Charles W. Eliot University Professor and President Emeritus, Harvard University; former Secretary of the Treasury; former Director of the National Economic Council
This program was funded by the Evelyn Y. Davis Foundation. NPF is solely responsible for the content.
