Richest 1% Of US Households Don’t Report 21% Of Their Income, Study Finds
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New analysis conducted by Internal Revenue Service (IRS) researchers and academic economists estimates that the richest 1% of US households don’t report 21% of their income.
In a paper published this week, the researchers suggested that the richest Americans dodge a lot more in income taxes than the IRS had previously thought.
Overall, the study estimates that the richest 1% fail to report 21% of their income, with six percentage points of the omissions down to ‘undetected sophisticated evasion’ strategies designed to fool the federal government’s random audits.
Examples of strategies used by high-income Americans avoiding tax include offshore tax avoidance as well as partnerships. The paper’s lead nongovernment author, Daniel Reck of the London School of Economics, said this kind of behaviour may be increasing and becoming harder for tax authorities to pin down.
Per The Wall Street Journal, Reck commented:
There is more revenue than you might have thought at the very top.
What’s needed is a broader strategy that involves increased scrutiny of pass-through businesses [and] investments in the comprehensive audits that the IRS does in its global high-wealth program.
Pass-through businesses refer to situations in which income passes directly onto owners’ individual tax returns and isn’t taxed at the corporate level.
They are reportedly a large and increasingly important part of the wealth of the top 1%, particularly the top 0.1%, with investment funds, real-estate businesses and closely held family firms among the business that are often structured as partnerships.
While partnerships themselves are legal to use, the IRS has struggled to find evidence of tax evasion inside the various levels of the companies.
The authors of the paper say that the results indicate evasion which ‘requires administrative resources to detect and deter’.
The researchers estimate that 36% of unpaid federal income taxes are owed by the top 1%, and that ‘collecting all unpaid federal income tax from this group would increase federal revenues by about $175 billion annually’.
They continued, ‘There has been much discussion in the United States about the fact that the audit rate at the top of the income distribution has declined. Our results suggest that such low audit rates are not optimal.’
Random audits ‘do not capture most tax evasion through offshore accounts and pass-through businesses, both of which are quantitatively important at the top’, the authors claim, which in turn leads to a significant underestimation of the incomes of the wealthiest people and the country’s overall inequality.
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