Former U.S. Treasury chief Lawrence Summers to IRS: Audit the rich
The U.S. government could collect an additional $100 billion a year without raising taxes a cent. How? By having the IRS audit more rich people.
That's the conclusion of former U.S. Treasury chief Lawrence Summers. In a new paper, the former economic adviser to President Obama and University of Pennsylvania law professor Natasha Sarin estimate that $630 billion in federal taxes will go missing in 2020 — a hefty 15% of annual tax receipts.
Buttressed with more funding, the IRS could help stop the leakage by conducting more audits of taxpayers earning more than $1 million a year, Summers and Sarin write. The agency's enforcement budget has dropped by a quarter since 2010, and it now has fewer auditors than at any point since World War II. Only 3% of Americans who made over $1 million were audited last year, according to a Syracuse University analysis.
As the audit budget has shrunk, so has the IRS' audit rate. But the drop hasn't been equal across income groups. A person claiming the Earned Income Tax Credit is about as likely to be audited today as they were in 2011. But a person earning more than $500,000 a year is just one-quarter as likely to be audited today as they were eight years ago, the paper says.
Other reports have shown that the IRS today is more likely to audit a resident of a poor, rural county than a resident of the wealthiest U.S. counties.
That's exactly backwards, according to Summers and Sarin. While people all across the income spectrum underreport what they make, it's more common among higher earners. "Underreporting is more than five times as high for individuals who earn $10 million or more annual than it is for those who make under $200,000 a year," they write.
Likewise, spending an extra hour auditing a person who makes $5 million a year is seven times as profitable for the IRS as spending that hour auditing someone who makes $200,000.
"Everyone agrees that the money that goes to pay those auditors returns a multiple of what's spent on their salaries and overhead," said Chuck Marr, director of federal tax policy at the Center for Budget and Policy Priorities, a liberal think tank.
He added, "Honest people want to know that they're paying their taxes and other people are paying their taxes. And if trust breaks down and people can't trust that others are paying their taxes, it falls apart."
In fact, lower audit rates have the effect of encouraging people to try to avoid taxes, according to the NBER paper, "as previously law-abiding filers realize that there are substantial gains — and little cost — to noncompliance."
Other ways to increase tax collection include focusing on estate taxes, a large portion of which go unpaid, and on business income, less than half of which is actually reported to the IRS, according to Kyle Pomerleau, a senior fellow at the conservative American Enterprise Institute.
Others says that increasing the IRS' budget isn't enough. The underlying problem, according to Garrett Watson, special projects manager at the conservative Tax Foundation, is that the U.S. taxes income from a business or investment at lower rates than income from a job. As long as that's the case, people will be tempted to pay the lowest taxes they can without breaking the law.
"Part of the problem is, you can increase enforcement, you can create rules, but there's an inherent incentive to mischaracterize your income," he said.