American wage-earners soon will begin receiving W-2 forms from their employers, signaling that the annual rite of paying income taxes is upon us. Most of us, anyway.
On Jan. 6, the Internal Revenue Servicereleased an estimate of the so-called "tax gap," the difference between how much is owed to the government and how much actually gets paid. In tax year 2006 Americans owed $450 billion more in income taxes than they actually paid.
It takes a while for the IRS to comb through the statistics, so the job is done only every five years.
Assuming this figure is roughly the same every year and allowing for inflation, that would be $4.5 trillion over 10 years — an amount that exceeds what the Simpson-Bowles deficit-reduction committee said is necessary to bring federal deficits under control.
According to the IRS, 83.1 percent of American taxpayers paid what they owed in 2006, down slightly from the 83.7 percent compliance rate in 2001, the last time the tax gap was estimated. The IRS figures it eventually will track down and collect $65 million of the $450 billion shortfall from 2006, bringing the compliance rate to 85.5 percent.
The tax gap is a separate issue from tax equity, the lack of which allows billionaires like Warren Buffett and millionaires like Mitt Romney to pay taxes at roughly the same 15 percent effective rate as middle-income Americans. This may be wrong, but it's not illegal. Tax evasion is.
Depending on your political persuasion, the $450 billion gap suggests that (a) patriots are managing to keep 14.5 percent of their money that the government otherwise would "confiscate," or (b) tax cheats are shorting the government one out of every seven dollars owed for what Justice Holmes called "the price of civilization."
Odds are that if you're a wage-earner or executive who has taxes withheld from his paycheck, you're likely to be in compliance. While some wage earners cheat on taxes — usually by taking deductions to which they're not entitled — the threat (however remote) of an audit keeps most people honest.
The biggest part of the tax gap comes from black-market or gray-market businesses — everything from a shade-tree mechanic who takes $100 in cash for a brake job to millions of dollars in diamonds changing hands.
Noncompliance (such a nice name for stealing) also is prevalent with pension and investment income. Pension funds and brokerage houses report payments to the IRS, but they don't withhold taxes. The weaker the reporting requirements, the more cheating is found.
And then there are our Swiss friends. Since a 2009 scandal involving the Swiss bank UBS — it admitted to helping account holders evade $780 million in U.S. taxes — the IRS has waged a well-publicized campaign to crack the traditional secrecy of Swiss and other offshore banks.
The idea is that average citizens might not complain so much about taxes if they know that the IRS is zealously prosecuting fat cats. The IRS could do more of this if tax-averse congressional Republicans didn't keep cutting its budget and staffing.
Some 30,000 U.S. citizens took advantage of IRS amnesty programs in 2009 and 2011, coming forward with information that helped the IRS recover more than $3 billion from banks and account holders.
The IRS says there won't be any more amnesty programs. It has prosecuted dozens of U.S. tax cheats and their Swiss bank enablers, usually settling for fines and payments of back taxes. Cases are continuing.
People rich enough to have secret Swiss bank accounts usually can afford good lawyers, so most of the cases have ended with plea agreements. That's too bad; the sight of a few dozen millionaire tax cheats being hauled off to prison in handcuffs could go a long way to closing the tax gap.
Copyright St. Louis Post-Dispatch. Reprinted with permission.