I never went to law school.
Neither did Abraham Lincoln. Both Lincoln and I came about our knowledge of the law by good old-fashioned brow sweat. He studied a friend’s law books. I took the more modern approach. I watched reruns of the black and white “Perry Mason” TV show.
A generation of Americans learned the law from Mr. Mason. Mason was a criminal defense attorney. District Attorney Hamilton Burger (yes, Ham Burger, though we were never treated to that informal title) played the Washington Generals to Mason’s Harlem Globetrotters.
Mason never lost and we were entertained along the way. Mason always got his client off by proving who had done the dastardly act. The most important lesson I learned from Mr. Mason is that the guy who dunnit always had two traits – motive and opportunity.
We have quite an impressive budget deficit. We also have very real and serious infrastructure needs. Senate Republicans claim President Biden will use infrastructure as an excuse to raise taxes.
Perhaps. Or there may be an alternative. More and more evidence is mounting that we are not collecting anything close to what is owed from the present tax structure.
Budget figures are typically presented over a 10-year horizon. Estimates of annual tax underpayments recently made by IRS personnel and academic economists are about $500 billion each year.
If we could actually close this collection gap that might add $5 trillion of revenue over the 10-year budget horizon. That amount would pay for infrastructure, the recent COVID relief, and other proposed economic relief. Of course we can’t collect everything – but why not try for a little more?
President Biden is asking for $80 billion a year of additional IRS resources. The administration thinks it can help collect $700 billion more each year.
How do you catch the perpetrators?
This is where Perry Mason comes in. Finding the additional money should start by asking who has the motive and the opportunity to underpay their taxes.
The more you pay in tax the greater is the motivation to avoid taxes. More to the point, higher marginal tax rates provide a greatest motive to avoid reporting taxable income. So Mr. Mason would set his investigator on the trail of the highest income folks.
What about opportunity? Lower income people get most, and sometimes all, of their income from sources that are reported to the IRS. Wages are reported on a W-2. Interest is reported on a 1099 form.
High income people can also be “caught” by document matches. But recent research suggests that the very high income (top 1%) can effectively conceal a lot of their income.
Finding concealed income is much harder than finding income matched to an information return. Consider the typical Easter egg hunt. The 4-and-under crowd is first sent out to pick up the eggs sitting up on the grass. By comparison, the older kids feel they must wade through the swamp plucking eggs from alligators.
The recent study supports the need to handle audits as swamp searches. Instead IRS tries to just tackle the tots and snatch their eggs.
The recent study estimates 36% of all underpaid taxes are from the top 1% of earners. This may sound like bashing the rich. But it’s logical – motive and opportunity.
The motive, we have said, is clear. The opportunity is in part the nature of the income sources, which are less likely to be reported to the IRS than is so for other income groups.
The opportunity also seems to be the ability to fall into highly sophisticated tax schemes, including offshore investments that cannot easily be traced. Sophisticated use of pass-through entities can also hide income.
This is why increasing the rate of “standard” audits will not work within the top 1%. Sophisticated hiding requires sophisticated means of tracking.
Now the IRS functions like D.A. Ham Burger. Black and white audits in a web-connected world. The results are predictable.
Need infrastructure? There’s only a few ways to pay for it. We can keep being suckers or raise some funds for a posse that can actually catch the bad guys. We need the top 1% to say, like Butch and Sundance, “Who are those guys?”
Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at email@example.com.