High-income tax avoidance much greater than expected, new paper estimates

These strategies include offshore tax avoidance, which may have declined after more stringent reporting requirements came into effect about a decade ago. But many high-income Americans also use partnerships and similar entities to avoid taxes, and such behavior can increase and be more difficult for tax authorities to find and disentangle, said Daniel Reck of the London School of Economics, the leading nongovernmental author of the paper.

Such pass-through businesses – where income is passed directly to their owners’ individual tax returns and not taxed at the corporate level – make up a large and increasingly significant portion of the top 1% wealth, particularly the top 0.1 %. Investment funds, real estate companies and close-knit family businesses in various sectors are often structured as partnerships.

“There is more income than you might have thought at the very top,” Mr. Reck said. “What is needed is a broader strategy that focuses more on pass-through companies [and] investment in the extensive audits that the IRS conducts in its global high wealth program. “

IRS Commissioner Charles Rettig briefly referred to the investigation – scheduled for Monday as a National Bureau of Economic Research working paper – in a congressional testimony last week, when he urged lawmakers to give the agency more money for enforcement.

“It’s not just a count of the number of people we have in enforcement,” said Mr. Rettig, who argued that every additional dollar spent on tax enforcement could bring in $ 5 to $ 7 in revenue. “We need specialized agents.”

Tax avoidance research can be difficult and imprecise because you need to see what is intentionally hidden. The paper emphasizes that more work is needed to measure tax compliance by high-income Americans. The authors include John Guyton and Patrick Langetieg of the IRS, Max Risch of Carnegie Mellon University, and Gabriel Zucman, an economist from the University of California, Berkeley who has advocated an annual wealth tax.

IRS control rates and enforcement personnel have steadily declined over a decade amid budget cuts, some from government cuts and some targeting the IRS after the agency said it mis-investigated a number of conservative groups. President Biden and other Democrats have proposed reversing that trend with a significant expansion of the US tax administration.

The most ambitious proposals include estimates that a reinforced IRS, armed with more people and tougher rules requiring more corporate reporting of financial information, could raise an additional $ 1 trillion in a decade without imposing taxes. Some Republicans have recently shown their openness to expanding the IRS budget, but Democrats have yet to try to advance the far-reaching proposals.

Using internal tax return data from the IRS, the researchers looked at people who disclosed offshore accounts about a decade ago when the IRS encouraged people to come forward in exchange for more lenient treatment. They found that hundreds of them had been selected years before their disclosures for the random audits the IRS uses to measure tax avoidance – and that the IRS auditors only found the offshore accounts 7% of the time.

For the pass-through companies and complex partnerships, the researchers assumed non-compliance rates between those of large corporations and sole proprietorships, both areas where the IRS has better data than in those random audits it uses for investigative purposes on pass-throughs. That led to higher avoidance projections than previous IRS methods.

The research is a major contributor to understanding tax avoidance and should bolster calls to give the IRS more resources, said Jason DeBacker, a professor at the University of South Carolina who has written separately on the topic.

However, he said some of the outcome depends on assumptions about pass-through companies that are reasonable but less concrete than the way other avoidance is measured.

“They don’t have such a clear approach to identify what the [IRS] lost out on pass-on revenues as they do for offshore income, ”said Mr. DeBacker in an email.

Write to Richard Rubin at [email protected]