As Tax Day approaches it’s appropriate to think about how the wealthiest among us escape paying their fair share. We can argue over whether there ought to be brackets with higher rates than the current 37% on earnings over $600,000. What I doubt anyone will argue with is need to close the loopholes and tax dodges that high earners use to avoid paying even the current rates.
Propublica, the nonprofit newsroom based in New York, published an article recently discussing this very issue. They found that it is virtually impossible to enforce the tax code against millionaires due to the ability to create complex transactions and the army of attorneys and accountants they can muster to defend and obfuscate those transactions.
In 2016 the Internal Revenue Service determined a wealthy individual named Georg Schaeffler had engaged in abusive tax maneuvers. He stood accused of masking about $5 billion in income. The IRS wanted over $1.2 billion in back taxes and penalties. Schaeffler, is the billionaire heir of a family-owned German manufacturer.
A crack team of specialists formed in 2009 was assigned to the case and embarked on a contentious audit of Schaeffler in 2012. But after seven years of grinding bureaucratic combat in which they were outnumbered by Schaeffler's attorneys and accountants, the IRS abandoned its campaign. The agency informed Schaeffler’s lawyers it was willing to accept just tens of millions, according to a person familiar with the audit.
Shortly after the IRS formed its special team to go after tax cheats like Schaeffler Republicans in Congress began slashing the agency’s budget. The team didn’t receive the resources it was promised and needed in order to do battle with teams like those Schaeffler hired. Since then thousands of IRS employees have left the agency, especially those with expertise in complex audits, the kinds of specialists necessary to staff such an elite unit. The agency had planned to assign 242 examiners to the group by 2012, according to a report by the IRS’ inspector general. But by 2014, it had only 96 auditors. By last year, the number had fallen to 58.
Here’s why this is some important and why you and I have a right to be angry. Studies show that the wealthiest are more likely to avoid paying taxes. Those earning in the top 0.5 percent in income, or $500,000 to $19,000,000, account for fully a fifth of all the underreported income, according to a 2010 study by the IRS’ Andrew Johns and the University of Michigan’s Joel Slemrod. After adjusting for inflation, that’s more than $50 billion in unpaid taxes for 2017 out of a total of $1,587 billion. That’s an average of $62,500 in underreported income per member of the top 0.5 percent. Another way to look at it is they’re underreporting more than the average American worker earns in a year and they’re getting away with it.
While I’d like to say it’s all the Republicans’ fault I have to be honest and admit that there are plenty of Democrats taking campaign donations from those advocating for special tax loopholes that their clients can use to skip out on paying their fair share. We have a bi-partisan problem that is created and exploited by our campaign finance system. When wealthy people do most of the donating then it’s mostly wealthy people our elected officials listen to. Ultimately the only fix for this is public financing of campaigns. In the short term consider donating $5 or $10 to presidential candidates like Elizabeth Warren and Bernie Sanders who promise not to take money from political action committees.
Published in the Seguin Gazette - April 12, 2019