The U.S. government is on pace to lose $7.5 trillion to unpaid taxes over the next decade.
If the Internal Revenue Service fully enforced America’s existing (historically lenient) tax laws, Congress could establish universal public day care, tuition-free college, paid family leave, and a national high-speed rail system — while simultaneously bringing every household in the nation above the poverty line through direct cash support — without raising taxes or increasing the deficit by a single cent.
Yet our elected representatives have been working diligently to leave this money on the table (and/or in the Cayman Islands). Since the tea party–wave election in 2010, Congress has cut the IRS’s enforcement budget by 25 percent — and compelled the agency to concentrate its newly scarce investigatory funds on preventing ineligible poor people from securing state support through the earned income tax credit (EITC). As a result, there’s never been a better time for American fat cats to stiff Uncle Sam.
In Donald Trump’s tax returns, one can find colorful illustrations of a wide variety of American social ills. As reported by the New York Times, the president’s filings spotlight the obscene regressivity of the U.S. tax code, the supremacy of image over reality in our nation’s popular culture, and the inequities in who can and cannot secure access to credit in private financial markets, among other things. But the civic sickness that Trump’s returns spotlight most vividly is the one outlined above: our government’s willful failure to hold the superrich accountable to its tax laws.
Previous reporting from the Times already provided probable cause for believing that the Trump family violated the law so as to evade taxes on intergenerational wealth transfers. The paper’s new exposé suggests that Trump fraudulently claimed a tax refund worth $72.9 million. This sum was, apparently, sufficient to raise eyebrows at the IRS, which launched an audit of Trump’s claim in 2011. And yet, for reasons that remain opaque, that audit still has not been resolved. The nature of the holdup is unclear. But it seems safe to assume that a properly funded tax-collection agency would be capable of ascertaining the legitimacy of a single tax refund in nine years’ time.
Meanwhile, Trump’s tax records are replete with gaming that straddles the line between “against the spirit of the law” and “against the law.” His apparent practice of reducing his family’s tax liabilities — while simultaneously increasing their effective income — by laundering “consulting fees” to his daughter and writing off a wide array of personal consumption as business expenses may well cross over into outright illegality. Regardless, in a nation where billionaires’ tax violations were tightly policed — and meaningfully punished — the incentive for families like the Trumps to push the envelope on creative accounting would be greatly diminished.
One can reasonably argue that the real scandal in Trump’s tax documents is what’s legal. Over the past four decades, the effective tax rates paid by America’s superrich have plummeted, even as their share of pretax income gains has skyrocketed. By some estimates, the 400 wealthiest Americans paid a lower percentage of their earnings to the U.S. Treasury than the working poor. Meanwhile, according to one recent study from the Rand Corporation, had national income growth been distributed as evenly over the past 45 years as it was in 1975 (instead of being shifted toward those at the top), the median wage in the U.S. would be nearly double what it is today. In such an alternative economic universe, the bottom 90 percent of U.S. households would have earned $2.5 trillion more last year. As is, those trillions in annual market income accrue to the rich, who are then taxed at a fraction of the rate that their less-lavishly compensated predecessors face.
All this said, Trump’s returns are not a textbook example of plutocratic tax avoidance. It is not unusual for an American plutocrat to pay a lower tax rate than an ordinary worker. But it is deeply odd for a billionaire to pay less in federal taxes in absolute terms than the typical schoolteacher; for a billionaire to pay less than $800 in federal taxes is outright bizarre. Loopholes and regressive giveaways in the tax code abetted Trump’s tax avoidance. But a well-earned sense of impunity made it possible for the mogul to take his machinations to such unseemly extremes.
Progressives would be wise to emphasize this point. The Democratic Party’s growing reliance on affluent voters — and its persistent terror of backlash to broad-based tax increases — has led Joe Biden to forswear raising rates on those who earn less than $400,000. At the same time, superstitious fears of the national debt limit moderate Democratic senators’ appetites for deficit-financed social spending. In this context, the hundreds of billions of dollars in new revenue that could be generated merely through the enforcement of existing laws are a vital tool for expanding the bounds of political possibility.
Tax enforcement is never going to be perfect. And a comprehensive approach to combating evasion will require a great deal of international cooperation. But the IRS has grown so feeble, large sums of revenue can be secured through modest investments in our domestic tax-collection apparatus. At present, the agency doesn’t merely fail to scrutinize the dodgy tax filings it takes in, it also fails to sanction one-third of the high-income Americans who decline to file any tax documents at all. Between 2014 and 2016, 300,000 U.S. residents with incomes above $100,000 decided not to file their taxes and suffered no consequences. If the IRS merely sought to collect the money it’s owed by high-income non-filers — a relatively cheap and easy form of enforcement — it would reap more than $100 billion in revenue over the coming decade, according Summers and Sarin’s calculations.
If the agency reinvested that money into building out its broader enforcement capacities, Summers and Sarin estimate that it would reel in over $1 trillion in new revenue by 2030. Former IRS Commissioner Charles Rossotti argues that this is an underestimate, and that the agency could realistically generate $1.6 trillion, were its enforcement functions properly funded. Add that onto Biden’s proposed tax increases on the wealthy, and the amount of new social welfare that Democrats could enact, without raising taxes on the middle class or adding to the deficit, dramatically expands.
What’s more, cracking down on superrich tax evaders is a “pay for” that’s a political winner, in and of itself. A supermajority of Americans favor higher taxes on the rich. The percentage of voters who believe that the wealthy should be allowed to violate existing tax laws, even as ordinary Americans get hounded by the IRS, is surely miniscule.
It’s unclear whether the exposure of Trump’s tax dodging will cost him any votes. But Democrats should see to it that it costs his fellow miserly plutocrats billions of dollars. It’s past time for America’s rich to pay the government what’s due, so that the government can start paying down its unmet obligations to America’s working class.