The top 1% of Americans are avoiding paying an estimated $163 billion in taxes a year, according to the Treasury Department. That is pushing the estimated tax gap, the amount of money owed by taxpayers that isn't collected, to nearly around $600 billion annually, and to approximately $7 trillion in lost revenue over the next decade, the Treasury Department finds.
Tax evasion is concentrated among the wealthy in part because high-income taxpayers are able to employ experts who can better shield them from reporting their true incomes, the Treasury Department argued in a blog post. More complicated incomes such as partnerships and proprietorships – more frequent among high earners — have a far greater noncompliance rate that can hit as high as 55%.
"The tax gap can be a major source of inequity. Today's tax code contains two sets of rules: one for regular wage and salary workers who report virtually all the income they earn; and another for wealthy taxpayers, who are often able to avoid a large share of the taxes they owe," wrote Treasury Deputy Assistant Secretary for Economic Policy Natasha Sarin.
The Biden administration and Democratic lawmakers areto "pay their fair share" and have proposed increasing IRS enforcement and income reporting as part of their effort to pay for a series of policy priorities.
According to the Treasury Department, the IRS is unable to collect about 15% of taxes owed and the lack of resources has led to a fall in audit rates. It notes, the drop in rates have decreased more in the last ten years for high earners than among low- and moderate-income earners helped by the Earned Income Tax Credit.
For the IRS to appropriately enforce tax laws against high earners and large corporations, it would need money to hire and train agents who can examine thousands of pages of sophisticated tax filings, Sarin said in the post. The agency would also need access to more information on incomes.
The Biden administration isby $80 billion over 10 years to help increase enforcement, IT and taxpayer services. It has also proposed more third-party reporting by financial institutions, so the IRS can better target sophisticated tax evasion, which Sarin said Wednesday would help generate an estimated $1.6 billion in additional revenue just from collecting taxes that are already due.
"This revenue will be collected in a highly progressive way, as the tax gap is more concentrated toward the top of the income distribution," she wrote.
Democrats are looking for ways to pay for apackage that would tackle initiatives from education to healthcare and climate change. Congressional committees are in the process of drafting legislation this month including changes to the tax code as well as enforcement and reporting provisions.
"I think there is broad agreement between the House and Senate that the wealthy must pay their fair share, that our tax system must be made far more progressive and that we can pay for a large chunk of this bill by doing just those things," Senate Majority Leader Chuck Schumer said Wednesday.
But increasing funding to the agency responsible for tax collection as well as changing the tax code to increase taxes on the wealthiest Americans and corporations faces significant challenges. Republicans and lobbying groups are pushing back on efforts to reverse some of the provisions in the Trump tax law, which cut the corporate tax rate to 21%, temporarily changed income tax brackets and shifted and eliminated some deductions. The Tax Policy Center found the law reduced average taxes on all income groups after passage, but higher income households received larger cuts.
With no GOP lawmakers expected to support the legislation, Democrats will need to get every Senate Democrat onboard and have almost no room for holdouts in the House, meaning they will have to walk a fine line on what centrists as well as progressive lawmakers will be willing to accept as the expansive legislation moves forward.