Opinion | The I.R.S. Is Outgunned

The president of the United States paid less in federal taxes than all but the poorest Americans the year he was elected. This is in large part because he lost more money than nearly anybody else in this country for years, a troubling fact given his promise to “run America like his business.”

But the responsibility for his meager $750 tax bill does not lie with President Trump alone, nor with his tax advisers. Instead, the newest revelations put a very famous face on a problem that has long existed: The wealthy aren’t paying what they owe, and our tax system allows it.

This is not a new problem, but it is one that has gotten worse in the last decade, the result of a partisan attack on the I.R.S. that has deprived it of the resources it needs to police evasion aggressively. In the last decade, the I.R.S.’s budget has fallen (in real terms) by nearly 15 percent. Its enforcement budget has fallen 25 percent over this period, and its work force has been slashed by 20 percent.

These grim numbers do not even take into account the growth in the economy and the increasing complexity of tax returns. In fact, as a share of gross tax collections, the I.R.S. budget is down nearly 50 percent from its peak in 1993.

As my work with the former Treasury Lawrence Summers shows, the result of this underinvestment is that the I.R.S. today cannot administer tax laws effectively. Based on current trends, in the next decade the I.R.S. will fail to collect an estimated $7.5 trillion in owed tax. That “tax gap” corresponds to nearly 3 percent of G.D.P. annually.

The beneficiaries of a gutted I.R.S. are the elite. Even if all taxpayers were equally likely to evade their liabilities, the benefits to the top 1 percent from underpaying would still be significant: 1 percent of this $7.5 trillion, or $75 billion. But the top 1 percent share of the tax gap is at least 30 times this amount, more than $2 trillion in the coming decade.

To understand this magnitude, consider this: If the I.R.S. were able to collect the unpaid taxes that the top 1 percent owe — absent any increases in top tax rates or new system of wealth taxation — enough revenue would be generated to wipe out student debt for most people in this country.

Why are the wealthy skirting the tax laws most aggressively? It’s a feature of our tax collection system. Compliance rates for ordinary wage and salary workers are 99 percent because their taxes are automatically withheld. In contrast, richer Americans are more likely to have items like capital gains, rental income and proprietorship income — and the I.R.S. estimates that up to 55 percent of the income from such sources can be unreported, and thus untaxed.

As a matter of equity and efficiency, then, it seems obvious that the I.R.S.’s limited enforcement dollars should go to policing high earners, both because they have the largest tax bills and because they have the most opportunity to shirk their liabilities by accumulating income from opaque categories and making shady deductions (think of Mr. Trump’s listing of $70,000 to hairstylists as a “business expense”).

Yet that is not at all where the enforcement attention focuses today. While audit rates have nose-dived across the board over the past decade, they’ve fallen inversely with income level, with the most precipitous drop for the highest earners: Examination rates for those making $10 million or more annually have plummeted by nearly 80 percent.

On the other end of the distribution, examinations of low-income households decreased by less than half as much. As a result, today you are as likely to be audited if you make so little that you qualify for the earned-income tax credit as if you are in the top 1 percent.

The I.R.S. commissioner, Charles Rettig, is explicit about why this is happening: Going after the poor is more efficient in a narrow sense (despite the low stakes in any individual case), because it’s cheaper and faster than pursuing the rich and the corporations they own.

It is David versus Goliath, with an understaffed I.R.S. faced with wealthy individuals and large corporations that have high-paid tax advisers and plenty of resources to drag out a fight with the agency. So it is no surprise that the I.R.S. has shifted its focus. Why spend years on complex investigations of the ultrarich that you are unlikely to win?

The result is both direct losses to the government in additional tax liability imposed (which has fallen in lock step with the decline in I.R.S. enforcement) and indirect losses as potential tax cheats realize there are few risks to evasion.

The Trump case is actually an exception to this general rule, as the president is under significant audit for, among other irregularities, a large loss deduction associated with a catastrophic Atlantic City venture. If the I.R.S. prevails — which appears likely — he will owe about $100 million in tax and interest.

The far more common outcome for wealthy evaders, though, is absolutely penalty at all. Indeed, just a few hundred taxpayers deprived the government of $10 billion from 2014 to 2016 by committing the most blatant form of evasion, failing to file tax returns all together. The I.R.S. lacked the resources to even work these cases.

To be sure, much of the scandal in the Trump case, and generally, when it comes to how little the ultrawealthy and large corporations pay, is all the tax avoidance moves that are legal. The government would greatly benefit from the closure of loopholes that allow the richest Americans to defer or reduce their tax liabilities and from an overhaul of corporate taxation to discourage profit-shifting.

But cracking down on illegal evasion should be first order in a new administration. Investing in the I.R.S. would allow for hiring and training agents to go up against the wealthy and the battalion of accountants and lawyers they employ. More resources will also facilitate a much-needed technological overhaul — enabling the I.R.S. to better leverage all it knows about taxpayers and even to collect additional information from third parties so it can focus attention on the most egregious evaders.

The result would be a substantial increase in revenue: We estimate more than $1 trillion could be collected in a decade, while a former I.R.S. commissioner, Charles Rossotti, suggests even greater potential, of $1.6 trillion.

Perhaps more important, a robust attack on the tax gap will signal an end to our two-tiered tax system, where those with enough money are able to subvert the tax laws with little fear of repercussions. At a time when inequities in the criminal justice system are appropriately a cause of significant concern, those same inequities in tax administration deserve the attention of policymakers.

A quotation from Justice Oliver Wendell Holmes is etched on the wall at I.R.S. headquarters: “Taxes are what we pay for a civilized society.” President Trump is one insidious example of the wealthy not paying their fair share. We have to invest in tax compliance so they are forced to.

Natasha Sarin (@NatashaRSarin) does research at the intersection of law and finance at the University of Pennsylvania.

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