The Tax Gap Gets a Second Mention!

The Washington Post reports this morning in an opinion piece:

But there’s some lower-hanging, revenue-raising fruit that has not featured prominently in leaks from the White House or Capitol Hill: giving the Internal Revenue Service more money.

Increasing spending to help pay for spending may seem counterintuitive. It makes more sense when you consider that every additional dollar invested in the IRS generates a $6 return, according to Treasury estimates, by enabling the agency to detect and collect tax bills already owed.

Thanks to years of budget cuts, the overall IRS budget is about 20 percent below its level a decade ago in inflation-adjusted terms. Meanwhile, the agency has been given more and more responsibilities. These include implementing the Foreign Account Tax Compliance Act, combating identity theft and tax-refund fraud, dispensing multiple rounds of pandemic stimulus payments, and, possibly very soon, issuing monthly cash payments to families with children.

With fewer resources available to handle all these duties, something had to give. That something turned out to be enforcement. Tax cheats can now get away with murder — or at least the ability to substantially shortchange Uncle Sam.

The number of IRS revenue agents — the auditors qualified to examine complex returns — has plummeted 43 percent over the past decade, according to a report from Syracuse University’s Transactional Records Access Clearinghouse. Audit rates of those filing these complex returns have also sharply declined.

For example, the number of millionaires who were audited in fiscal 2020 was about a quarter of the number from fiscal 2012. Accordingly, these IRS audits turned up unreported tax bills of $1.2 billion last year, about a quarter of the $4.8 billion found in fiscal 2012.

These numbers are presumably not declining because wealthy people and corporations have suddenly become more scrupulous about paying exactly what they owe. They know the IRS is outgunned; if anything, cutbacks in IRS audits and declining referrals for criminal prosecution have emboldened tax cheats — or at least encouraged well-heeled filers and the armies of tax experts they employ to attempt increasingly aggressive interpretations of the law.

The more conspicuous this lack of enforcement gets, the more additional people are likely to duck their tax duties. This has happened in other countries, such as Greece and Italy, where perceptions that everyone else is shirking have led to cascading tax evasion. No one wants to be the only chump left following the law.

Estimates for the size of the U.S. “tax gap” — the difference between what’s owed and what’s collected — vary. By one estimate, from economists Natasha Sarin (who was recently appointed to a post at Biden’s Treasury Department) and Lawrence H. Summers (the former treasury secretary who is also a Post contributing columnist), the IRS will fail to collect nearly $7.5 trillion of legally owed taxes over the next decade. Even that may understate the amount of evasion. A new paper co-authored by IRS employees suggests the ultrawealthy may be hiding more money abroad than had been previously estimated.

If about $7.5 trillion is going to be left uncollected in the next 10 years as the opinion asserts, then the tax gap averages about $750 billion/year. As noted here a few days ago, estimates of the tax gap varied. Tax cheats get to keep ~$400 billion/year (frightened IRS), ~$600 billion/year for 2021 (Janet Yellin) or ~$700 billion/year ± ~ $30 billion for 2021 (my estimate).

Looks like my estimate is closer to the mark than the IRS estimate. And, maybe it is closer than Treasury Secretary Janet Yellin estimates. 

Democracy has Fallen in Georgia

The authoritarianism of the republican party crossed into some form of Christian fascism in the wake of the 1/6 coup attempt by the ex-president and a mob of traitors. Most or all of the fascist GOP (FGOP) leadership fell in line with the big lie that the 2020 election was fraudulent. Although a few voters left the party after the 1/6 coup attempt, most rank and file republican voters were in accord with the big lie and falsely believed the lie was reality and reality was a lie.

After the election, the ex-president make voter suppression his main target for FGOP policy. In turn, the FGOP has responded enthusiastically to the demagogue's desire to rig future state elections so that their candidates always win, even when they clearly lose the vote. Georgia is the first state to give state FGOP officials the power to legally void a vote and award the win to the republican. The FGOP in Georgia has given the tyrant demagogue exactly what he wanted. Georgia is well on the way to true fascism. Other FGOP-controlled states can reasonably be expected to follow suit in the coming months.

Some people saw this coming and tried to warn us

Some people with experience in the fall of democracy to a tyrant demagogue saw the danger the ex-president presented to American democracy. Years earlier, reporter Masha Gessen had witnessed the fall of Russian democracy to the tyrant Putin. She wrote this in 2016 a day after the election and Clinton had conceded. This was what Gessen wished Clinton had said in her concession speech, but did not say. Gessen was prescient:

“Thank you, my friends. Thank you. Thank you. We have lost. We have lost, and this is the last day of my political career, so I will say what must be said. We are standing at the edge of the abyss. Our political system, our society, our country itself are in greater danger than at any time in the last century and a half. The president-elect has made his intentions clear, and it would be immoral to pretend otherwise. We must band together right now to defend the laws, the institutions, and the ideals on which our country is based.”

 
That, or something like that, is what Hillary Clinton should have said on Wednesday [in her concession speech to the ex-president].

Like most Americans, Clinton did not see the looming fascist danger in the ex-president or the republican party. Some, maybe most, Americans today still do not see it. Polling in Georgia indicates that about 75% of people there oppose various provisions that the FGOP has put into law. That suggests that even some republican voters are uneasy with the transition from democracy to tyranny. Disregard for public opinion, along with contempt for elections and voter's wishes, are clear signs of the new American fascism. They have been signs of fascism ever since it was invented.

The Georgia situation

The New York Times comments on the situation in Georgia:

Georgia Republicans on Thursday passed a sweeping law to restrict voting access in the state, introducing more rigid voter identification requirements for absentee balloting, limiting drop boxes and expanding the Legislature’s power over elections. The new measures make Georgia the first major battleground to overhaul its election system since the turmoil of last year’s presidential contest.

The legislation, which followed Democratic victories that flipped the state at the presidential and Senate levels, comes amid a national movement among Republican-controlled state legislatures to mount the most extensive contraction of voting access in generations. Seeking to appease a conservative base that remains incensed about the results of the 2020 election, Republicans have already passed a similar law in Iowa, and are moving forward with efforts to restrict voting in states including Arizona, Florida and Texas.

Mr. Biden joined Georgia Democrats on Thursday in denouncing efforts to limit voting, calling Republicans’ push around the country “the most pernicious thing.”

“This makes Jim Crow look like Jim Eagle,” he said at his first formal news conference since taking office.

Though the law is less stringent than the initial iterations of the bill, it introduces a raft of new restrictions for voting and elections in the state, including limiting drop boxes, stripping the secretary of state of some of his authority, imposing new oversight of county election boards, restricting who can vote with provisional ballots, and making it a crime to offer food or water to voters waiting in lines. The law also requires runoff elections to be held four weeks after the original vote, instead of the current nine weeks. (emphasis added)

Think of that a moment. It was an intentional distraction from the fact that republicans can now overturn election votes they don't like, i.e., when a democrat wins, but the FGOP actually had the astounding arrogance and hate in it to make it a crime to provide food or water to voters. Those are people standing for hours in lines the FGOP intentionally created to keep people from voting. If that isn't some form of fascism, what is it? It isn't democracy, that's for sure.

American democracy is clearly under a major, sustained direct attack by a radical extremist FGOP. The coming fights over protecting voter rights in the Senate will be bitter and brimming with hate and lust for vengeance, regardless of the outcome. At present, it looks like the GOP will be able to block any meaningful defense of democracy, which will be free to fall in the states the ex-president needs to be elected in 2024. All the demagogue tyrant needs is three or four more states to fall and that will be the end of American democracy and the American experiment for the foreseeable future, maybe forever. 

Those fights could come down to one or two radical conservative democratic Senators, Joe Manchin (WV) and possibly Krysten Sinema (AZ) who oppose moving forward with voter protection without significant GOP Senate support. There is no reason to think that even a few, if any, FGOP senators have any interest in protecting voter rights when their party leadership and its cult leader (the ex-president) is hell-bent on rigging elections as Georgia has now done.

It is deeply sad to see how easily democracy can fall under pressure from a corrupt, mendacious tyrant demagogue flying on the back of the dark free speech dragon. Gessen could see just how fragile democracy was. And, she could clearly see the danger of a demagogue tyrant for what it was and still is. 

Has America learned its lesson? Are we really going to let our country slide into a full-blown fascist demagogic tyranny? Is fascism inevitable because democracy is so fragile? Or, is this just a kerfuffle in a teapot or whatever kerfuffles happen in?

Does Transparency Inhibit Political Compromise?

“Publicity is justly commended as a remedy for social and industrial disease. Sunlight is said to be the best of disinfectants. . . ” —Louis Brandeis, United States Supreme Court Justice, 1933, arguing for transparency

“Just as important as transparency is the ability of lawmakers to effectively work on behalf of those who sent us here.” —Mark Schoesler, Washington State Senate Minority Leader, 2018, arguing against transparency 

A 2019 research paper (link to the preprint), Does Transparency Inhibit Political Compromise?, focuses on this topic. As discussed here recently, lack of reasonable transparency in Supreme Court operations leaves the institution open to charges of unduly politicizing the rule of law at the expense of legal principle and the public interest. The criticism of politicizing laws at the expense of the public interest also applies to the process of legislation. The court claims it needs to operate in secrecy for "obvious reasons", but no significant reasons appear to exist. The judges just don't want what they actually do to be scrutinized. That's the reason.

Legislators claim that what they do needs to be shrouded in secrecy, including negotiation to reach compromise. Since congress and some or most state legislatures no longer operate on the basis of compromise, that defense of opacity falls to actual reality.

The preprint paper's abstract is blunt.[1] Based on their analysis, secrecy is not necessary for compromise:

Politicians and scholars contend that governmental transparency reforms constrain politicians’ capacity to negotiate and compromise in the pursuit of policy goals. However, existing research primarily emphasizes only that governments are strategic in adopting these reforms; whether lawmakers actually incur the alleged costs of transparency remains an open question. We investigate this issue in the context of American state legislatures, many of which have become exempt from “sunshine laws” in recent decades. Legislators justify these exemptions by claiming that transparency impedes deal-making and coalition-building, producing gridlock. We leverage variation in the timing of sunshine law adoptions and exemptions to identify their effect on legislative productivity, polarization, partisanship, policy change, and budget delay. Our analyses refute legislators’ argument for opacity; we report precisely-estimated negligible and contradictory effects of sunshine law exposure. We conclude that transparency does not inhibit political compromise. Legislative deliberation is equally or perhaps more effective under open governance requirements.

The argument that closed-door meetings are needed for dialogue and negotiation because that might not happen in public view. This sentiment is common among politicians throughout the world. The paper's authors point out that despite this standard defense of opacity, there is no research that directly measures whether that argument has any empirical support. Thus the question of whether transparency laws really do constrain politicians' capacity to negotiate and compromise is unanswered. The researchers looked at whether American public access to the legislative process limited indicators of political compromise, specifically productivity, polarization, partisanship, policy change, and budget delay. The researchers directly tested whether governmental transparency and efficiency are mutually exclusive.

Although common sense is an essentially contested concept, and people will bicker forever over it most of the time (~97% ?), it seems reasonable at ask, what does your common sense tell you about the reasons for needless opacity in government? At this point, what David Cay Johnston had to say in 2003 in his book Perfectly Legal about how things work bears repeating:

Sen. John Breaux (D-LA) said that "instead of drilling for oil and gas, Exxon was drilling the tax code, looking for ways to find more and more tax shelters." Senator Grassley said that "what hit me the most was the moral fiber of the people involved," who he said displayed "unbridled greed and blatant disregard for the law of fairness." 

Some politicians warn off the public by advising us fool taxpayers that politics is like making sausage. If you have a weak stomach, don't look at how we do our business. In other words, you don't ask and we won't tell.

My common sense tells me two things: First, some (most?) politicians want to operate in secrecy to hide their own immorality, hypocrisy, corruption, incompetence, ignorance, sheer stupidity, culpability[2] and/or betrayal of the public interest. They want to keep their bloody sausage fingerprints on the murder weapon from ever being found.

Second, forcing in as much transparency as reasonably possible would make the sausage making a lot less disgusting because the sausage makers would know they are being watched and their lies, corruption, culpability for failure and etc., are more likely to be found out and come back to bite them. Transparency should apply to both politicians and the lobbyists who often come with cash in hand demanding gifts from legislators. The public needs to see as much of this as possible. 

So, do you want to see more or less of the sausage making? 

Footnotes: 

1. The final published paper's abstract has been softened, presumably by peer review. It reads as follows:

Governments around the world face an apparent tension when considering whether to allow public access to the governing process. In principle, transparent institutions promote accountability and good governance. However, politicians and scholars contend that such reforms also constrain politicians' capacity to negotiate and compromise, producing inefficiency and gridlock. This argument—that transparency inhibits compromise—is widely accepted, but rarely empirically tested. We develop a theoretical framework around the claim and evaluate it in the context of American state legislatures. We leverage temporal variation in state “sunshine law” adoptions and legislative exemptions to identify the effects of transparency on several observable indicators of compromise: legislative productivity, polarization, partisanship, policy change, and budget delay. Our analyses generally do not support the argument; we mostly report precisely estimated negligible effects. Thus, transparency may not be the hindrance to policy making that conventional wisdom suggests. Effective governance appears possible in state legislatures even under public scrutiny.

 2. Regarding culpability, radical right Senator Ben Sasse (R-NE) commented in 2018 about the gutless US Senate and why it produces such a poor quality product: 

“. . . . . the people don't have a way to fire the bureaucrats. What we mostly do around this body is not pass laws. What we mostly decide to do is to give permission to the secretary or the administrator of bureaucracy X, Y or Z to make law-like regulations. That’s mostly what we do here. We go home and we pretend we make laws. No we don’t. We write giant pieces of legislation, 1200 pages, 1500 pages long, that people haven’t read, filled with all these terms that are undefined, and say to secretary of such and such that he shall promulgate rules that do the rest of our dang jobs. That’s why there are so many fights about the executive branch and the judiciary, because this body rarely finishes its work. [joking] And, the House is even worse.”

Secrecy allows Senators to avoid culpability for their own bad legislation.

"For political players, a lack of transparency results in a deep sense of 

security, freedom from accountability 

and a good path get what one wants" (Germaine)

The Tax Gap Gets Mentioned!!

Sen. John Breaux (D-LA) said that "instead of drilling for oil and gas, Exxon was drilling the tax code, looking for ways to find more and more tax shelters." Senator Grassley said that "what hit me the most was the moral fiber of the people involved," who he said displayed "unbridled greed and blatant disregard for the law of fairness." -- David Cay Johnston, Perfectly Legal, 2003

There is no law of fairness and moral fiber is irrelevant. Heck, morality is irrelevant and Grassley is a clueless dinosaur with way too much power. -- Germaine, 2021 

The net tax gap

Years ago I stumbled across the concept of a stealthy, quiet, never mentioned concept called the net tax gap. I remember it well. It was one of my milk curdling moments.  

But holy foschizzle! It was mentioned yesterday in passing on a business channel. Janet Yellen commented blandly that the current gap is running at $600 billion/year and she would take a look at it.

Translation: She will do nothing about it and could not care less.

Will miracles never cease? The tax gap is actually mentioned in public by someone with some real power. 

The net tax gap is a simple concept, but it is important. 

The magic math equation: The net tax gap = what is owed in taxes - what is paid in taxes. 

Translation into American: In non mathematical language, the gap is the difference between what is owed and what is paid.

So, if $1 trillion is owed to the US Treasury in taxes, but only $550 billion is paid, the net tax gap is $450 billion. That is $450 billion is what the US treasury is cheated out of and what us idiot honest taxpayers have to support in added federal debt financing. 

That's it. That's the whole shebang. My estimate (based on detailed IRS data and analysis for 2001 and 2006) put it at about $700 billion/year ± ~ $30 billion for 2021, while the last squeak the IRS made in public a few years ago was that it is only $400 billion/year at that time. I was more right than the IRS. The IRS was clearly lying about it due to threats from congress to really gut the agency if it didn't shut up and stopped bothering people about paying their taxes.

So there it is, tax cheats get to keep ~$400 billion/year (frightened IRS),  ~$600 billion/year (bland Yellin) or ~$700 billion/year (grumpy Germaine).

Fortunately for huge corporations, they buy and get lots of legal loopholes from sleazeballs in congress, so they don't have to cheat (as much). What a bunch of valiant patriots! HUZZAH!!

Yabut, waddabout the federal debt?

Glad you asked. Anyone in congress who complains about federal debt but blocks action on dealing with the tax gap, e.g., all most or republicans, is a liar. They do not care about the debt. They care about keeping politics corrupt and sleazy. They care far more about keeping tax cheats content and free to cheat than they do about stupid honest tax payers who do not cheat. 

That's two-party politics and business as usual. This sleaze and corruption has been going on for decades. The US Treasury has been cheated out of trillions, maybe about $10 trillion since 2000. That's almost a lot of money. Almost, but not enough to get congress jazzed about anything about it -- too many re-elections are at stake.

Hooray! I don't feel a thing.

Ouch