Guest: Can tax evaders finance Biden’s expenses?

The Biden government is proposing tougher tax enforcement to pay for the $ 3.5 trillion budget adjustment package. Collecting statutory taxes is a laudable goal, but politicians have historically discounted the cost of tax compliance. History can repeat itself.

The most controversial enforcement proposal is for banks and other financial institutions to report all accounts with an annual cash flow in excess of $ 600. Groups like the American Bankers Association and the US Chamber of Commerce have heavily criticized the proposal. Knowing that business groups sometimes protest too much, how should we evaluate this proposal?

The administration’s interest in enforcement arises from the tax loophole or taxes that have to be paid but are not paid. A tax gap is inevitable as people respond to incentives, including taxes. People respond to taxes by circumventing or exploiting loopholes to legally reduce their liability and tax evasion, or they fail to pay legally owed taxes. The tax gap is due to tax evasion.

The principle of equality before the law implies that everyone should pay as required by law. Many Americans consider tax evasion immoral and support efforts to get scammers to pay.

We do not know the exact amount of the tax gap because we lack statistics on intentionally hidden income. Economists Natasha Sarin and Lawrence Summers estimate it at $ 630 billion in 2020, or about 15% of the taxes that should have been paid. Improved enforcement will never deliver the entire $ 630 billion to Uncle Sam. If we were to reduce our tax gap to the lowest level seen in developed countries, we could raise an additional $ 300 billion annually. This will not eliminate the current federal deficit of $ 3 trillion.

Individual income tax accounts for over 90% of the tax gap and has a larger gap in relation to tax owed than corporate, wage or inheritance tax. However, since most American employers report their income to the IRS, there is little opportunity for them to evade taxes. The greatest tax evasion is “run-through” corporate income taxed according to individual income tax.

The American Bankers Association questions “whether the new reporting requirements would improve the IRS’s ability to identify higher-income tax evaders.” I agree. And since most Americans are barely able to evade taxes, the data on most bank accounts needs to be of minimal enforceability.

Tackling tax evaders is one of several ways that politicians portray new spending as costly. Left politicians continue to propose taxing the rich and corporations, while conservatives advocate the elimination of “waste, fraud and abuse”. Public choice economics predicts that politicians should use such moves to get as much support as possible while avoiding opposition. Politicians usually gain support by giving things to people, while taxes or other costs face resistance.

The costs of tax compliance, i.e. the costs for companies and taxpayers to prepare their taxes and to justify their declarations in the event of a tax audit, should be included in the calculation of the net funding by the policy. However, presenting new compliance measures as the sole effect on tax evaders reduces these costs. We have little sympathy for the fraudsters and never notice how much our tax preparation costs increase.

Banks were represented by Uncle Sam in compliance with taxes and regulations. It is estimated that compliance accounts for 10% of banks’ operating expenses, even more for small community banks. Perhaps one in ten employees does paperwork for government agencies instead of helping customers or reviewing loan applications.

The compliance burdens on banks have real consequences. Policymakers have recently been racking their brains over bankless Americans who are using payday and title lenders (and paying high fees) instead of banks. But compliance costs ultimately have to be paid by the customer and make small accounts increasingly unprofitable. The new reporting requirements are intended to make this even worse.

Taxes are one of the two inevitables of life, so we despise those who cheat the tax officer. But eliminating the tax gap is one of several ways politicians are using new spending to look like it costs next to nothing. If Americans really support President Biden’s spending agenda, then we should agree to pay higher taxes and not further burden the banks.

Daniel Sutter is the Charles G. Koch Professor of Economics at the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are those of the author and do not necessarily reflect the views of Troy University.

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