Answering Fred Hiatt’s challenge.
As an electronic subscriber to the Washington Post, I get an email early every morning highlighting various items at the Post. Yesterday morning, Fred Hiatt, editorial page director of the Post, emailed me (and, presumably, tens of thousands of others) to praise the work of WaPo columnist Catherine Rampell. Exhibit A was her recent column titled “The GOP rebrands itself as the party of tax cheats,” October 21, 2021.
Hiatt writes:
She [Rampell] minces no words in “The GOP rebrands itself as the party of tax cheats” — but the argument that she soberly puts forward strikes me as pretty difficult to refute.
Well, let’s see how difficult it is to refute.
Rampell’s basic claim is that the latest recruit to the Republicans’ big tent is tax cheats. That’s the point she needs to establish.
Then she goes on to discuss the “tax gap,” the IRS’s estimate of the difference between what taxpayers owe and what they pay. The gap, she writes, is “predominantly owed by wealthy individuals.” I have no reason to doubt this. She also points out that rank-and-file wage earners find it harder to “shortchange Uncle Sam.” Again, she’s probably right.
Then she gets a little more controversial. She writes:
Tax cheating is not a victimless crime. When (disproportionately high-income) people don’t pay their bills, everyone else must pay more to fill the shortfall.
Her implicit assumption is that the IRS is going to raise x dollars and if it receives x – 100 billion dollars, it will raises taxes on others to get that $100 billion. She could be right, but I think that’s less clear than she thinks. We don’t have a good enough model of the IRS or of Congress to judge that claim.
But let’s grant her point and see where she goes with it. We’re almost there.
Rampell writes:
This solution [more reporting] is exactly what Democrats have proposed as part of their big budget bill.
What’s that reporting solution? She writes:
Under Democrats’ latest proposal, banks would — once a year — also report the sums of all deposits and withdrawals for certain accounts. Not every transaction; just the year-end totals. Only accounts with flows of more than $10,000 not tied to wage income or exempted benefits would be affected — the idea being that the IRS already knows about the wage income anyway.
How would the IRS know whether the flow of $10,000 or more is not tied to wage income? Wouldn’t it have to check? And in checking, wouldn’t it have to know which deposits to the account are wages? She doesn’t address that.
Rampell argues:
Banks complain that reporting requirements might be burdensome to financial institutions and taxpayers. Actually, banks already must file a report on any account that earns more than $10 in interest in a year; adding a couple of lines for aggregate inflow and outflow numbers is hardly outrageous.
Her argument seems to be that the burden is minimal. But then she needs to explain why banks are lobbying so hard against it. She doesn’t.
And then she goes “there,” with the standard “if you have nothing to hide, you have nothing to worry about.” She writes:
As for taxpayers, the only ones who have anything to fear are those who cheat.
Really? So if someone is not cheating, he or she would not at all worry about the IRS having data on inflows and outflows to his/her account? Can Catherine Rampell not think of any other reason why people wouldn’t want their financial privacy violated more than it already is?
And remember that she started off talking about the high rollers who are cheating on huge amounts of undeclared income. What does that have to do with the contractor who has an inflow or outflow of just over $10,000?
Hey, Fred Hiatt, throw us another soft pitch.
READER COMMENTS
Christophe Biocca
Oct 25 2021 at 5:02pm
I’m reading her translation as the consequence of the new reporting requirements, as in “rich people are now going to pay the minimum amount of taxes the law already requires.”, with the implication that they pay less than the minimum right now. Which is consistent with the rest of her thesis.
Of course I’m not sure which rich people hide all their income in bank accounts with ~10k-year in activity.
robc
Oct 25 2021 at 5:45pm
This isn’t going to catch the wealthy, they have plenty of legal ways to avoid paying taxes. This is going to catch the house painter (or similar) who takes cash payments for some jobs. And will just lead to cash not being deposited.
There will be an increase in small scale money laundering.
And the next step will be to go away from cash transactions.
It is possible that I used house painter as an example because in the late 90s I got a cash discount from the guy who painted my condo. Probably because he didn’t want to have to pay check cashing fees, right? Yeah, that is my best guess.
David Henderson
Oct 25 2021 at 5:47pm
Christopher, You’re absolutely right. I screwed up. So I got rid of that part.
Thanks for your much more reasonable interpretation.
MarkW
Oct 25 2021 at 5:44pm
What does that have to do with the contractor who has an inflow or outflow of just over $10,000?
Never mind that — how does a W2 wage earner who deposits more than $10,000 in paychecks per year not also have over $10K in outflows when they merely spend the money they’ve earned?
As for who are the tax cheats, the wealthy have more money, but the most numerous cheats are surely people who receive a lot of income in cash. But this wouldn’t help catch them, because they’re not going to be stupid enough to deposit their undeclared cash.
Bottom line — this would cover almost everyone, and it only makes sense as a first step. It would only really become effective when cash was abolished (or perhaps limited to only low denomination bills) and when Bitcoin et al are strictly regulated.
robc
Oct 25 2021 at 5:47pm
Our posts are very similar…you beat me by 1 minute.
Matthias
Oct 26 2021 at 12:40am
Bitcoin doesn’t necessarily need to be strictly regulated. Cryptocurrencies just need to stay more annoying than paying taxes.
Similarly, the US can only restrict USD cash to low denominations only. They can’t abolish the 10,000 Singapore Dollar bill.
People could already use that bill. Or more realistically, 500 Euro bills.
But on balance, it’s too annoying to bother at the moment.
Eric Hanneken
Oct 26 2021 at 5:51am
The word I challenge is “must.” If a government plans to spend x billion dollars, but collects only x – 100 billion dollars, it could . . . spend only x – 100 billion dollars. Spending x billion is a choice, not a fact of nature.
Of course, these days if the federal government collects $x billion it spends $2x billion, which also weakens Rampell’s argument, although I assume tax revenue provides some restraint on spending.
Alan Goldhammer
Oct 26 2021 at 7:18am
David and others who have commented might want to pick up a copy of former WaPo reporter T.R. Reid’s book on the quest for a better tax system that was published in 2018. You can probably get through it in a day and it’s pretty persuasive in terms of what needs to be done with the American tax system. The current system is full of preferences (I see today that Elon Musk is now perhaps the richest man in America with Hertz buying a bunch of Teslas for their rental fleet. Why should Musk continue to profit from tax credits for the purchase of electric vehicles?) and the establishment of opaque LLCs (many in real estate) that make it easy to cheat on taxes.
The so-called wealth tax that is currently being developed by the Democrats is just another kludge to go after the wealthy when it would be a lot easier to move to a consumption tax (there’s a good reason why most of the world loves VAT; it’s easy to implement and cheating is extremely difficult). this coupled with a flat tax on income with no preferences will raise all the money necessary to fund government programs.
robc
Oct 26 2021 at 11:20am
Henry George wrote Progress and Poverty in 1879.
Alan Goldhammer
Oct 26 2021 at 12:48pm
I’m not sure that I understand this response to my post at all. I focused on the cumbersome nature of the US tax system. I have no familiarity with the book you cite.
robc
Oct 26 2021 at 5:15pm
I was referring to the Georgist Single Land Tax.
My point was that the better tax system had already been created more than a century ago, so no need to go looking at more recent books.
MarkW
Oct 26 2021 at 9:41am
I see today that Elon Musk is now perhaps the richest man in America with Hertz buying a bunch of Teslas for their rental fleet.
Elon Musk is the richest because he’s the driving force behind the most innovative companies (Tesla, SpaceX, Starlink). Who do you think should be the richest man in America?
Why should Musk continue to profit from tax credits for the purchase of electric vehicles?
Well, right now, he doesn’t — Tesla exhausted its tax credits. But don’t despair, the Democrats in Congress are now trying to hand out more (and remove the limits going forward). It’s really just about a full-time job to keep track of all the stupid stuff being planned in DC.
Alan Goldhammer
Oct 26 2021 at 12:50pm
Would Tesla have prospered to the extent that it did without tax preferences? Would Space X even exist had not the US government exited most of the space program? Musk saw an opening but I don’t think either of these companies are terribly innovative in the way that Apple was in the early days.
Zeke5123
Oct 26 2021 at 1:40pm
Tesla is probably the only car start up in the last 30 years that was successful. That suggests there is a there there.
SpaceX is incredibly innovative (eg reusing spacecraft). As a result, SpaceX has dramatically lowered the cost of near space exploitation.
Starlink of course is based on old tech but with a new interesting tweak that makes it potentially very useful as telecom.
None of these companies are producing heretofore unknown products but they are all making cool innovations on the margins that bring down costs that could lead to big thing (especially SpaceX and Starlink).
MarkW
Oct 26 2021 at 2:24pm
Would Tesla have prospered to the extent that it did without tax preferences?
Probably not, but then wasn’t the intent of the electric vehicle tax credits to induce people to buy EVs and promote an domestic EV industry?
Would Space X even exist had not the US government exited most of the space program?
Oh, yes. SpaceX now dominates the global commercial launch service business. I don’t think most people quite appreciate how far ahead SpaceX is in technology, cost-reduction, and pace of innovation.
Vivian Darkbloom
Oct 26 2021 at 10:00am
This is a good follow-up to Henderson’s earlier post “The Biden Full Court Press Against Economic Freedom”. Like Henderson, I detect a lot of weak spots in Rampell’s OpEd. Before delving into that, Hiatt’s mass e-mail (and indeed the Op-Ed in question) demonstrate to me how closely WaPo and other major media outlets are allied in pushing the administration’s agenda.
First, the “tax gap”. I can’t emphasize too much the fact that the “tax gap” is nothing but a very rough estimate. Nobody knows what it is. Per the IRS, the complete definition is:
“the shortfall between the amount of tax voluntarily and timely paid by taxpayers and the actual tax liability of taxpayers. It measures taxpayers’ failure to accurately report their full tax liabilities on tax returns (i.e., underreporting), pay taxes due from filed returns (i.e., underpayment), or file a required tax return altogether or on time (i.e., non-filing).”
Stated differently, the “tax gap” covers illegal tax evasion and underpayment and not legal tax avoidance. By “tax evasion” I also mean honest disputes among taxpayers and the IRS over how much tax is due with estimates of when the IRS is likely to prevail. Current voluntary compliance estimates are around 85 percent.
In my comment to David’s earlier post I mentioned that Summers and his protegé Natasha Sirin, a 32 year-old economist recently hired by the Treasury Department, are largely responsible for the unrealistic estimates of how much can revenue can be raised by draconian enforcement measures. I was therefore not surprised that Rampell links to Sirin support of her estimate of a tax gap of “nearly $600 billion”! It seems that Sirin is now responsible for formulating tax policy for the world’s (second?) largest economy.
Unlike David, I’m not so quick to conclude that most of the “tax gap” is attributable to “wealthy individuals”. The most recent study that I could find (for 2019) *estimated* the tax gap at $554 billion. As with estimates of the tax gap for other earlier years, about 70 percent of this was attributable to individual taxes. Of that, approximately 8 percent is attributable to “capital income”, 36 percent to business and self-employment income and 12 percent to unreported labor income. Per the recent IRS report, I would rather place my bets on the majority being attributable to self-employed and small and medium sized unincorporated businesses under-reporting their income. Other sources are improperly claimed earned income credits, overstated deductions, etc,etc.
Even a cursory review of the data should reveal that if we assume her upper-bound $600 billion tax gap estimate, it is nearly impossible that the “majority” ($300 billion+) of this be attributable to “wealthy individuals”.
The IRS also understands that it makes no sense to spend $2 in enforcement in order to collect an additional $1 of income. A “tax gap” will always exist. At best, I would think the upper bound on compliance is in the low 90 percent vicinity and the point at which enforcement costs exceed revenue raised is likely even lower.
“Actually, banks already must file a report on any account that earns more than $10 in interest in a year; adding a couple of lines for aggregate inflow and outflow numbers is hardly outrageous.”
As I pointed out in the earlier comment, this is yet another attempt to outsource enforcement to third parties at huge costs that are off the federal books. Where’s the total cost-benefit analysis? Rampell apparently has no idea how much banks already spend being deputy sheriff’s for the IRS. And, this isn’t simply a matter of “reporting”; banks will be expected and required to do additional “due diligence” and investigation of customer activity. It’s not unlikely, for example, that the cost of FATCA to all parties, government and private, greatly exceeds the amount of additional revenue to the US government. See, here, which, as a cautionary tale, should be required reading for Rampell and Sirin:
http://kluwertaxblog.com/2017/04/18/15527/
Alan Goldhammer
Oct 26 2021 at 12:55pm
Perhaps the US Government ought to take a page out of the Texas approach to regulating abortion and establish a bounty system for turning in tax avoiders. This would lead to some highly competitive approaches and even if the US gives the bounty hunters 10%, they would still capture a good amount of money for no enforcement cost!!!
Vivian Darkbloom
Oct 26 2021 at 1:11pm
It already exists. Rewards are between 15 and 30 percent.
https://www.irs.gov/compliance/whistleblower-office
And, we still have a tax gap!
Alan Goldhammer
Oct 26 2021 at 2:00pm
Thanks, I was not aware of that. It seems as though they are capturing significant amounts of money: https://www.irs.gov/pub/irs-pdf/p5241.pdf with a very modest staff!!!
robc
Oct 26 2021 at 5:18pm
They are saving costs by not providing valid links!
Vivian Darkbloom
Oct 26 2021 at 10:17am
And, this:
“As for taxpayers, the only ones who have anything to fear are those who cheat.”
I agree with David that this is the “standard response”. I learned very early in my legal career how wrong that response is. Early on I did some defense work for those investigated and/or accused of crimes. Dostoevsky could well have written a compelling novel called “Prosecution and Punishment” or even “Investigation and Punishment”. The point here is that merely being investigated and/or charged with a crime is itself a great punishment. It was a real eye-opener to me to see how much stress and anguish those subject to investigation or criminal prosecution undergo. Not only the actual subject but their family members. This and the damage to reputation doesn’t go away with acquittal. Nor do the legal fees.
Much the same is true of IRS audits. Even the most law-abiding citizens are subject to a lot of stress if they are the subject of an IRS audit or inquiry. They may have forgotten to report that $11 of interest income from a lost bank account. Or, perhaps the IRS doesn’t agree with their valuation of that donated car. Maybe they reported a maximum balance of $10,000 on their foreign bank account rather than the actual $10,221. How many audits end up with “no adjustments” or minimal adjustments? Sorry, but this is not going to eliminate the time spent or the stress endured. Nor is the IRS going to refund those legal fees you incurred to prove your innocence. I want to tell young Rampell and Sirin that they should go out and get some actual experience before they tell the rest of us that government has everything to gain from this and normal citizens have “nothing to fear”.
Mark Z
Oct 26 2021 at 2:03pm
I’m curious, does the IRS itself keep records on the statistics of the outcomes of their audits, such as what fraction find no need for adjustment?
Vivian Darkbloom
Oct 26 2021 at 2:29pm
Searching through the tables here should be enough to satisfy your curiousity:
https://www.irs.gov/statistics/compliance-presence
Billy Kaubashine
Oct 26 2021 at 10:52am
The program won’t generate much in the way of tax revenue from the wealthy, but it will drive a lot of cash into mattresses and safe-deposit boxes, and will surely raise less revenue than hoped for.
Neither the ‘Super-rich’ nor the ‘Working-rich’ are skimming cash to avoid taxes. That’s the domain of the lowest 2 income quintiles. This will cause the cash economy to shun banks altogether. Disintermediation, anyone?
It’s also likely to trigger a lot of ‘false positive’ audits that will be a huge inconvenience to small businesses and trades people yet result in little or no incremental revenue.
Alan Goldhammer
Oct 26 2021 at 12:57pm
This statement doesn’t wash in light of the abuse of the Roth IRA system to shield huge capital gains (e.g., Peter Thiel being the prime example) along with the use of off and on shore avoidance mechanims (South Dakota and Nevada perpetual trusts).
David Henderson
Oct 26 2021 at 1:02pm
How was Thiel’s use of the Roth IRA system an example of abuse?
Alan Goldhammer
Oct 26 2021 at 1:53pm
https://www.propublica.org/article/lord-of-the-roths-how-tech-mogul-peter-thiel-turned-a-retirement-account-for-the-middle-class-into-a-5-billion-dollar-tax-free-piggy-bank
Vivian Darkbloom
Oct 27 2021 at 3:32am
I’m not sure that what Thiel did was an “abuse” of the Roth IRA system. “Abuse” is not a legal term and it’s not susceptible in this context to precise definition. Nevertheless, I think it demonstrates a flaw in the design of the Roth IRA system.
Thiel set co-founded Paypal in 1998. He contributed shares of Paypal in 1999 to a Roth IRA. Contributions to Roths are limited to $2,000 per year. In 2002 Ebay bought Paypal for $1.5 billion. The problem here, or at least the potential problem, is how to value shares of a closely held company without any earnings history. As far as I know (I don’t have time to do the research required) there is no requirement to obtain an independent valuation of those non-publicly-traded shares prior to contributing to a Roth. Thiel certainly had inside information regarding Paypal that would put him in a unique position to estimate value and current value is a partial reflection of potential future value. I imagine that hundreds of thousands of people make $2,000 to Roth IRA’s each year. This is (was) normally considered a routine transaction requiring only a simple declaration to the IRS that would not trigger IRS scrutiny. By the time the details of this transaction would have become evident it is likely the statute of limitations would have run.
Valuation is one Achilles Heel of taxation. For example, economists are usually called on to provide “valuation reports” to support the “arm’s length” nature of transactions between related companies. Even if a valuation report was issued here in support of Thiel’s contribution (doubtful), based on my experience (we had numerous PhD economists working at our firm doing exactly that), I wouldn’t have much confidence in it. We can say, with perfect hindsight, that those shares had an almost unbelievable increase in value between 1999 and 2002. Were there any contemporaneous transactions with outside investors to support that valuation? Apparently not. At the very least, the optics here are not good and don’t engender confidence that our tax system operates equally fairly for the rich and poor.
There are a number of ways to “fix” this. I think the simplest would restrict contributions to IRA’s (Roth’s and regular) to marketed securities.
Todd Moodey
Oct 26 2021 at 2:25pm
You can’t make unlimited contributions to an IRA, so the notion that he put huge sums into one and they grew tax ***deferred*** (Roth IRA monies are taxed upon withdrawal, so they’re not tax free) is just incorrect; at the very least, the optics of the story are misleading.
If he had a certain stock in his IRA that then appreciated enormously, that’s a possibility available to everyone and therefore hardly an “abuse” of the vehicle.
Alan Goldhammer
Oct 26 2021 at 2:48pm
You are mixing up Roth IRAs and traditional IRAs. Traditional IRAs are taxed on withdrawal as I well know having paid taxes on my IRA every year save last year’s pandemic exception to withdrawals. Money that goes into Roth IRAs is taxed before going in and qualified withdrawals are not taxed which is a huge boon to Peter Thiel. I don’t know if he was the first one to figure out this tax haven but he is perhaps the best known.
robc
Oct 26 2021 at 5:20pm
Following the letter of the law isn’t abuse.
It may be a poorly written law, but that isn’t Thiel’s fault.
MarkW
Oct 26 2021 at 2:38pm
This statement doesn’t wash…
Using complex, legal tax avoidance methods is not the same as criminally ‘skimming cash’. And adding more burdensome, costly, privacy-threatening bank reporting requirements would in no way have affected Peter Thiel’s Roth IRA. Not to mention that your or I, too, could have made a legal IRA contribution a decade ago, put it all in Tesla stock, and earned a 26,965.10% tax-free return. But I wasn’t smart or lucky enough to do that — were you?
Todd Moodey
Oct 26 2021 at 3:01pm
You’re correct! What he did, however, is still not an abuse of the Roth vehicle.
Todd Moodey
Oct 26 2021 at 3:03pm
Meant as a reply to Alan Goldhammer’s reply to my post!
Tim Worstall
Oct 27 2021 at 10:12am
“don’t pay their bills, everyone else must pay more to fill the shortfall.”
That’s not true either. Any setting of tax rates includes “behavioural issues” aka folks changing their behaviours to not have to pay it, legally or illegally, in estimates of yield.
That folks fiddle is already built into the system.
Ryan M
Oct 27 2021 at 12:19pm
Interestingly, the most amount of “cheating” I have ever encountered in my life comes from the opposite end. My dad – who once worked as a real estate agent – told me a long time ago that a boss said to him: “If you can’t come up with a way to keep the deposit, you’re a bad agent.” Much along those lines, at the bottom end of the spectrum, virtually everyone has ways to be on the public dole. Whether that is food stamps, rental assistance, outright welfare, whatever the case may be. Last night, we took my 10 year old out to a restaurant for his birthday. Across from us (it was a Hibachi grill) sat a family, and at one point, the mom was on the phone talking about her rental assistance and other forms of welfare. Meanwhile, she ordered herself and both kids literally the most expensive dish at the restaurant. I’m not at all saying she shouldn’t be free to make this choice – but it is an example of the sort of thing that would certainly qualify in the minds of liberals as fraud.
Granted, I do work as a public defender, so this is what I see every day, but the lowest income earners have access to an insane amount of those handouts, and they take full advantage, with virtually no oversight. I have seen people come up with ways to remain unemployed in order to continue receiving funds. I’ve seen secretaries at a previous firm who file their taxes in such a way (e.g. both parents filing head of household) as to get thousands back in tax refunds.
My point, here, is that we have a massive government that spends trillions of dollars each year, and taxes just as much. The tax code is not simple; we have thousands upon thousands of people whose lives are devoted to either enforcing or navigating that tax code. “Fraud” exists because of the way this system is structured. Everyone is incentivized to “cheat.” At the top end, people want to keep their money. At the bottom end, people want to get as much as they possibly can of those tax dollars that are seemingly being handed out like candy.
One further note: During covid, there was a federal unemployment compensation program (may still be going?). The State of WA took advantage of this in the following way. It “laid off” all of its employees by giving them just enough days off to qualify for unemployment. It then sent out instructions to each employee on how to apply for federal funds. At the end of the day, these employees ended up getting a temporary raise, at federal expense. The State of WA pocketed the difference. I have no doubt that, if presented with this exact scenario but different actors, these same liberals would be crying bloody murder and writing these same pieces about “tax cheats.” And they might not even be all that far off base.
David Henderson
Oct 27 2021 at 1:14pm
Wow! Thank you for that story.
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