As governments in various countries contemplate how to deal with the impact of COVID and the lockdowns, taxes are expected to rise. In the US, the current administration wants to raise capital gains taxes, for example. Treasury data claims that hundreds of billions of dollars in revenues aren't being collected from top earners.
The US Treasury estimates that 1 per cent of US taxpayers (by income) had not paid about $163 billion in 2019, equating to 28 per cent of all unpaid taxes.
The figures, published this week, come after President Biden promised more resources earlier this year for the Internal Revenue Service to improve collection rates in order to help fund planned increases in public spending. In its American Families Plan, the government said that HNW citizens had been able to exploit weak revenue enforcement.
“A well-functioning tax system requires that everyone pays the taxes they owe. Today, the `tax gap’ - the difference between taxes that are owed and collected - totals around $600 billion annually and will mean approximately $7 trillion of lost tax revenue over the next decade. The sheer magnitude of lost revenue is striking: it is equal to 3 per cent of GDP, or all the income taxes paid by the lowest earning 90 per cent of taxpayers,” Natasha Sarin, deputy assistant secretary for economic policy at the US Treasury, said in a report published on September 7.
Such figures add fuel to debates about whether high net worth and ultra-HNW individuals are able to avoid high taxes – a hot issue at a time of claims and counter-claims about income and wealth inequality. Biden wants to increase capital gains taxes on top earners, among other steps. The wealth industry has spoken to Family Wealth Report about steps individuals and families can and should take. (See an example here.)
The Treasury article goes on to say: “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…..estimates from academic researchers suggest that more than $160 billion lost annually is from taxes that top 1 per cent choose not to pay.”
The organization said that an “under-staffed IRS,” using outdated technology, is unable to collect 15 per cent of taxes that are owed.
The US government proposes to boost the IRS budget by $80 billion, aiming to generate an estimated $320 billion in additional tax revenue over the next ten years.
The Treasury claims that higher-income taxpayers can use accountants and tax preparers to help shield them from their “true income tax liability.” Compliance can be hampered by HNW individuals using partnership income, proprietorship income and rental income as ways of shielding their earnings.