Giving Compass' Take:
- Daniel Reck et al share research that suggests that the IRS may significantly underestimate the scale of tax evasion among the top 1% of earners in the United States.
- Who suffers when top earners evade taxes? How can you contribute to and support a culture of tax compliance, especially among wealthy Americans?
- Read about taxes and charitable giving.
What is Giving Compass?
We connect donors to learning resources and ways to support community-led solutions. Learn more about us.
How much taxes do high-income Americans evade? And what kinds of evasion tactics do they use? These questions are important for tax enforcement policies and the measurement of income inequality in the United States. Answering them can improve tax enforcement policy and the fairness of federal fiscal policies more broadly, a key priority as policymakers attempt to build a more equitable economy in the wake of the coronavirus pandemic.
In a new study conducted in collaboration with researchers at the U.S. Internal Revenue Service, we show that American taxpayers with incomes in the top 1 percent are much more sophisticated than the other 99 percent at tax evasion. As a result, conventional estimates significantly underestimate the income and taxes evaded by the rich.
The IRS estimates that about 16 percent of all federal taxes go unpaid. A 16 percent tax gap means that $1 out of every $6 of taxes that should legally be paid is not paid. The IRS estimates that about 60 percent of the tax gap comes from underreporting of income on individuals’ tax returns. Conventionally, researchers at the agency and academics estimate this part of the tax gap with data from random audits. Most IRS audits are, of course, not random. The IRS generally prioritizes tax returns that it expects, based on a variety of factors, to be noncompliant. But to estimate the size of tax evasion and study its nature, the IRS also audits a number of returns randomly.
Our research shows that random audits may paint an accurate picture of the tax gap for 99 percent of taxpayers, but not for the top 1 percent. According to random audit data, all groups of the population underreport about 4 percent to 5 percent of their income on average. The only exception is the very top of the income distribution. Within the top 0.1 percent—taxpayers with income of more than $1.7 million—detected tax evasion falls to extremely low levels.
Interpreted naively, these data suggest that high-income people evade little when paying taxes. But substantial evidence from other sources of data, and many headlines that readers might recall, suggest that high-income tax evasion is far from minimal. Our new research provides concrete evidence that at least two types of tax evasion are quantitatively significant at the top of the U.S. income distribution and typically not detected through random audits.
Read the full article about tax evasion by Daniel Reck, Max Risch, and Gabriel Zucman at Equitable Growth.