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America's rigged tax collection system

By   Follow Me on Twitter     Message Gerald Scorse       (Page 1 of 2 pages)     Permalink    (# of views)   3 comments

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This article first appeared at www.nydailynews.com

Charges of rigging fill the air in today's America. Elections, the economy, college admissions, the list seems endless. Whatever the truth in other cases, our tax collection system is undeniably rigged. It's been so from the beginning, rigged against the vast majority of workers.

In 1943, under pressure to pay for World War II, Congress passed a law requiring employers to withhold taxes and report the incomes of their employees. The same law implicitly allows self-reporting by huge numbers of largely high-income taxpayers: landlords, self-employed professionals, small businesses, et al.

Tax compliance figures for the two groups differ starkly. The latest estimate from the Internal Revenue Service shows 99% compliance by wage and salary earners. Self-reporters, by contrast, are evading tens of billions in taxes year after year.

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This paragraph from the IRS study measures the impact of the rigging:

"Findings from earlier tax gap analyses that compliance is higher when amounts are subject to information reporting and even higher when also subject to withholding, continue to hold....Misreporting of income amounts subject to substantial information reporting and withholding is 1 percent; of income amounts subject to substantial information reporting but not withholding, it is 7 percent; and of income amounts subject to little or no information reporting, such as nonfarm proprietor income, it is 63 percent."

Self-reporters take several forms, for example S-corporations, partnerships, and limited liability companies (LLCs). They self-report via numerous avenues: business income, corporate income, self-employment taxes, credits, and more. If self-reporters have taken any capital gains in the stock market, brokerage firms are now required to report that income to the IRS. It's the only significant instance of their income getting the same reporting treatment as wages and salaries.

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The most recent IRS figures cover the period 2008-2010. Adding up all the under-reported categories, the agency estimated Treasury losses at $387 billion a year. Stunningly, self-reporters paid little more than a third of what they should have. (Really, you say? Go back to that paragraph from the IRS study, and do the math for yourself.)

Here's the agency's summation of what the numbers mean:

"A high level of voluntary tax compliance remains critical to help ensure taxpayer faith and fairness in the tax system. Those who don't pay what they owe ultimately shift the tax burden to those who properly meet their tax obligations. The new tax gap estimate updates long-standing research findings that information reporting and withholding are strongly associated with higher levels of voluntary compliance."

The words may be measured, the volume low--but it's actually a primal scream with an unmistakable message. The IRS is telling Congress that self-reporting dooms the federal government to losses of about $400 billion a year. It's also saying that America's wage and salary workers deserve an unrigged tax collection system--everybody's income should be reported, not just theirs.

Employers do the reporting for their employees; brokerage firms do it for stock market capital gains; let's turn to banks to do the job for current self-reporters. Income and expenses are the major information components. Some way, somehow, those components have to be identified, separated, and added up. At year's end, the totals should be reported to the IRS and to the income recipient. It would be nothing more (and nothing less) than a W-2 for self-reporters: the same as most American workers have been getting for decades.

If current technology isn't up to the job, then invent technology that is. There's nothing digital magic can't do. If you don't believe it, ask Siri.

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The bigger problem by far is political. The investment community fought relentlessly against basis reporting of capital gains. Entire other communities will do likewise to resist, demonize and delay any self-reporting reform. Listen to Bruce Bartlett in a 2012 op-ed examining, yes, the tax gap: "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." To which the obvious answer is: what does "liking" have to do with it?

Let's finish with a billion-dollar idea.

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Gerald E. Scorse is a freelance writer living in New York. His op-eds have appeared in newspapers across the United States

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2 people are discussing this page, with 3 comments  Post Comment


Gerald Scorse

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(Member since Nov 17, 2014), 15 articles, 31 comments, 1 diaries
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David Cay Johnston has easily done the most to bring self-reporting to the attention of the public. He's a Pulitzer Prize winning journalist, the former chief tax writer for The New York Times, and a co-founder (with Bruce Bartlett) of DC Report. Its mission: do everything possible to make up for the paucity of investigative reporters on the staffs of American newspapers. On self-reporting, and on numerous other issues as well, the country owes huge thanks to Johnston.

Submitted on Sunday, Dec 2, 2018 at 7:16:57 PM

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Don Smith

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The Repugs intentionally under-fund the IRS so that they can't stop tax cheats. I have a friend who is a tax examiner for the IRS. He says that they have the resources to investigate only a small proportion of (apparent) tax fraud. For ever dollar spent on enforcement, they'd get several dollars back. But the Repugs love tax cheats.

Submitted on Monday, Dec 3, 2018 at 12:21:51 AM

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Gerald Scorse

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There are statistics that back up everything you say: continual IRS under-funding, continuing drops in the percentage of returns audited, huge dollar returns for every IRS enforcement dollar. And of course, who gets most of the auditing attention? Low-income people who claim the Earned Income Tax Credit (the form for which is incredibly complicated to begin with). So it goes in this unfair tax world we live in.

Submitted on Monday, Dec 3, 2018 at 1:19:07 AM

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