Michael Evans
2/15/2006, 07:48 PM
If you are a wage and salary earner, the answer is probably yes. But if you are a sole proprietor, or receive income from other sources, the answer is almost definitely NO.
The IRS updated their tax gap estimates and published the results yesterday, and while the results are not greatly different from previous estimates, they are eye-opening nonetheless. Tax avoidance cost the government $345 billion in 2001, the latest year for which figures are available -- because they are based on a 3-yr audit that took place in 2002-04. That means that today's gigantic deficit would have completely disappeared if everyone had paid their taxes.
Of this $345 billion, $33 billion came from underpayment and $27 billion from nonfiling. Eventually, the government catches up with most of this. Of the other $285 billion, $197 is individuals, $54 billion is employment tax, $30 billion is corporate tax, and $4 billion is estate tax. The IRS concedes the $30 bn for corporate tax is an underestimate because it is based on old, outdated estimates.
The individual tax underpayments depend almost entirely on what kind of income one receives. The underreporting on wages and salaries is only 1%. By comparison, the underreporting on nonfarm proprietors income is 57%, and on farm income is 72%. These latter two figures, as high as they sound, are also underestimated because they do not catch many of the deductions that are overstated.
One possible suggestion is that all payments to the self-employed require a W-9 form, so that the government has a record of who was paid. Another possibility that has been suggested is to tighten up reporting requirements on credit card transactions. However, I doubt if these would make much difference. When marginal tax rates are close to 50%, people will cheat.
Whenever I say this, someone pulls out the Federal income tax rate chart with a top rate of 35%. However, the self-employed are also supposed to pay another 2.9% in Medicaid taxes. Above a certain level, the personal exemption disappears, which adds about another 1% to the marginal rate. Also above a certain level, state and local income taxes are not deductible, so if you live in a state with a top rate of 8%, that gets you to 47%. But it's even worse on the way up, because as those deductions are withdrawn, the marginal rate is even higher for a while.
I testified in favor of a flat tax for many years, but when people started walking out of the room as soon as the topic came up, I realized it was time to quit. There are simply too many vested interests in keeping the current complex tax code as it is. And if the Democrats come back into office in 2008, their first order of business will be to increase the top marginal rates, just like Bill Clinton did. After all, there's that big deficit to be reduced. The net effect will be more and more tax avoidance. I suppose you could say that these days, it's the American way.
The IRS updated their tax gap estimates and published the results yesterday, and while the results are not greatly different from previous estimates, they are eye-opening nonetheless. Tax avoidance cost the government $345 billion in 2001, the latest year for which figures are available -- because they are based on a 3-yr audit that took place in 2002-04. That means that today's gigantic deficit would have completely disappeared if everyone had paid their taxes.
Of this $345 billion, $33 billion came from underpayment and $27 billion from nonfiling. Eventually, the government catches up with most of this. Of the other $285 billion, $197 is individuals, $54 billion is employment tax, $30 billion is corporate tax, and $4 billion is estate tax. The IRS concedes the $30 bn for corporate tax is an underestimate because it is based on old, outdated estimates.
The individual tax underpayments depend almost entirely on what kind of income one receives. The underreporting on wages and salaries is only 1%. By comparison, the underreporting on nonfarm proprietors income is 57%, and on farm income is 72%. These latter two figures, as high as they sound, are also underestimated because they do not catch many of the deductions that are overstated.
One possible suggestion is that all payments to the self-employed require a W-9 form, so that the government has a record of who was paid. Another possibility that has been suggested is to tighten up reporting requirements on credit card transactions. However, I doubt if these would make much difference. When marginal tax rates are close to 50%, people will cheat.
Whenever I say this, someone pulls out the Federal income tax rate chart with a top rate of 35%. However, the self-employed are also supposed to pay another 2.9% in Medicaid taxes. Above a certain level, the personal exemption disappears, which adds about another 1% to the marginal rate. Also above a certain level, state and local income taxes are not deductible, so if you live in a state with a top rate of 8%, that gets you to 47%. But it's even worse on the way up, because as those deductions are withdrawn, the marginal rate is even higher for a while.
I testified in favor of a flat tax for many years, but when people started walking out of the room as soon as the topic came up, I realized it was time to quit. There are simply too many vested interests in keeping the current complex tax code as it is. And if the Democrats come back into office in 2008, their first order of business will be to increase the top marginal rates, just like Bill Clinton did. After all, there's that big deficit to be reduced. The net effect will be more and more tax avoidance. I suppose you could say that these days, it's the American way.