Like the lady above whose smartphone is being stolen from her purse, we are all being victimized by thieves. Just who are these thieves? They are the ever-growing number of people who are illegally evading their income taxes.
Now don’t confuse tax evasion with tax avoidance. Tax evasion is a federal crime. Tax avoidance is perfectly legal.
In a nutshell, tax evasion is intentionally not paying federal taxes that are legally owed. It generally involves deliberately under reporting income, claiming more or larger deductions and credits than the taxpayer is entitled to, or a combination of both.
Examples of evasion are:
- Accepting cash or crypto currency as payment for goods or services and then not reporting some or all of the amounts received as income;
- Claiming deductions or credits to which you are not legally entitled;
- Exaggerating the amounts of deductions or credits to which you are legally entitled.
Examples of income tax avoidance are:
- Contributing money to an IRA or pension fund;
- Investing in municipal bonds where the interest received is not taxable.
Judge Hand’s statement has been widely quoted by those promoting schemes to help people reduce their federal income taxes. However, Judge Hand was referring to “arranging his affairs” in a legal way—tax avoidance.
Many of us have come in contact with people who will offer a product or service at a lower price for cash. Some will openly admit that the reason for wanting cash is that they won’t report it as income on their federal tax return. Of course, paying for a product or service with cash is not illegal, so in this case, the customer is not breaking the law. However, when the provider fails to report this income on a tax return, he/she is guilty of tax evasion.
Rampant evasion is just one of the many problems with the income/payroll tax system that the FAIRtax fixes. No doubt there will be people who will try to evade the FAIRtax. However, in order to evade the FAIRtax, both the buyer and seller must participate in an illicit deal. Both would be guilty of evasion if they conclude an “off the record” transaction.
Evasion is not a victimless crime. Income/payroll tax evasion creates:
- Either higher taxes on the rest of us, or higher deficits if the politicians mask the amount of evasion by borrowing more and more money;
- Increased enforcement will lead to more audits and often unsubstantiated assessments not only on actual evaders, but also on the rest of us who are not trying to cheat the system;
- Less revenue for Social Security—not reporting income results in lower payments of Social Security taxes;
- Less revenue for states because people evading their federal taxes are evading their state taxes as well.
The study examined the amount of tax evasion as of the date of the study, and also projected the likely tax gap for the years 2017 through 2026. “Tax gap” is defined as the difference between the amount of federal income/payroll tax that is legally owed and the amount actually collected by the IRS. Here are some of their findings:
- Our estimated Gross Tax Gap for the period 2017 through 2026 lies within the range of $6.24 trillion (based on a growth rate that matches the average inflation rate) to $9.17 trillion (based on the historical growth rate of the Gross Tax Gap).
- Furthermore, our estimates indicate that the average household will be assessed a de facto annual “surtax” that lies in a range between $4,276 to $8,526 annually (in current dollars) from 2017-2026.
- This annual “surtax” will enable the federal government to raise the same level of revenue it would collect if all taxpayers were to report their income and pay their taxes in full.
- Moreover, the estimated ten-year gross tax burden for the average household from 2017-2026 lies in a range between $46,623 and $68,328 and is comparable in size to both the annual median and annual mean U.S. household income.
- Our estimates indicate that on average, in one out of the ten years ahead, each household will be working solely to pay off the 10-year accumulated “surtax”— arguably a heavy burden for every American household.
- This study also introduces the perspective that tax evasion under the FairTax would be a complex and difficult endeavor, especially if tax evasion penalties are strong. It is shown that the transaction costs of tax evasion under a FairTax regime would render tax evasion a challenging and complicating undertaking, one sufficiently onerous that evasion efforts would be very limited.
However, on April 12, 2021, IRS Commissioner Charles Retting testified before the Senate Finance Committee. Among the points he made were:
- The U.S. government is losing at least $1 trillion a year in unpaid taxes and needs more and more consistent Internal Revenue Service funding to go after tax cheats.
- The “tax gap” -- the difference between taxes legally owed and revenue collected – is no longer the last official estimate of a $441 billion annual average from 2011 to 2013 but at least $1 trillion.
- New sources of wealth arising since then, such as trading in cryptocurrencies, are escaping taxation.
- There is more evasion related to foreign-sourced income and abuses of business income passed through to individuals.
- Legislation is needed to require that transactions in cryptocurrencies such as Bitcoin be reported, similar to the way that securities transactions are reported on 1099 forms.
- The IRS is “outgunned” by increasingly sophisticated tax evasion schemes, while years of budget cuts have left it with about 17,000 fewer revenue enforcement staff than it had a decade ago.
- President Joe Biden’s fiscal 2022 budget request would boost the IRS budget by about $1.3 billion, or 10.4% over current levels. The proposed $13.2 billion IRS budget would include an additional $900 million for tax enforcement in fiscal 2022, which starts on Oct. 1.
Now that the IRS Commissioner has opened the curtain and admitted to the rapidly growing tax evasion problem, the Ruling Class and their minions will try to make some changes, like increasing the number of income tax audits, and hope that the public will forget the real problem—the income/payroll tax system is broken. The only way to lower evasion without violating the basic rights of all of us is to adopt a system that actually works better and protects our rights as Americans—the FAIRtax.
Most of us would not object if the increased IRS audits targeted only “tax cheats.” However, people evading taxes do not indicate on their 1040 return that they are “tax cheats.”
Therefore, the IRS doesn’t know who’s evading and who isn’t. With the mandate to “stamp out evasion”, there will need to be more aggressive enforcement. Since the Internal Revenue Code is filled with general statements—like business lunch or business trip, that are not defined, many small business owners and many others will find themselves facing large income tax bills because of arbitrary assessments.
If there’s one thing the Ruling Class wants to avoid at all costs, it’s being held responsible for anything that the voters may get upset about. To that end, they are constantly trying to divert attention toward issues like corporations and “the rich” not paying their fair share in taxes. They stubbornly keep the income/payroll tax system in place, but are constantly trying to shift the blame for all its problems onto others.
The bureaucrats have an unshakable faith in computer models. They believe that anything a computer model predicts just has to be true. They cling to this belief in spite of the fact that nearly all of their computer models on the effect of tax policies have been wildly inaccurate.
In 2019, there were about 30,000 IRS revenue agents responsible for collection. The models apparently show that if you add 17,000 more revenue agents bringing the total to 47,000, the evasion problem will be eliminated—or at least greatly reduced.
There were over 253 million federal income tax returns filed in 2019, and they want you to believe that just 47,000 revenue agents are going to solve the trillion-dollar evasion problem that’s buried in those 253 million returns? Madness!
Dr. Thomas Sowell is an economist and senior fellow at Stanford University’s Hoover Institution. His statement about bureaucrats really explains their all too often “brain-dead” solutions.
“You will never understand bureaucracies until you understand that for bureaucrats, procedure is everything and outcomes are nothing.”
Can more agents and more aggressive audits greatly reduce evasion? It can help if you start putting people in jail and taking their cars and houses for back taxes. This will send a message and a lot of people will eliminate or at least reduce their evasion of the federal income/payroll taxes. However, in most countries more repressive actions by government have eventually led to revolts by the oppressed citizens.
Even the Ruling Class doesn’t want to push us too far. The actual solution is for the Ruling Class and their minions in Congress to eliminate the payroll/income tax system and replace it with the FAIRtax!
They are clever people. With the enormous amounts now being spent by Congress, the Ruling Class and their minions in Congress will find other ways to profit at our expense. Sad but true.
But at least we will have a tax system that greatly reduces evasion, leads to more economic growth and prosperity for all of us and protects our basic rights as Americans.
It is time that Americans take control of our country by eliminating the income/payroll tax system. No more games that profit only the Ruling Class and their minions the politicians. ENACT THE FAIRTAX!
If you have friends who don’t know about the FAIRtax, send them to FAIRtax.org. Have them watch the white boards under “How It Works” and, if they agree, ask them to please join us.
Then contact your Members of Congress and the President and demand that Congress pass -the FAIRtax—the only fair tax.
Remember, if we don't continue to tell the truth and demand a change, then this quote from George Orwell's 1984 may foretell our children's future:
“If you want a picture of the future, imagine a boot stamping on a human face—forever.”
Is it hopeless? When confronted with a seemingly impossible problem, remember the statement attributed to the author George Bernard Shaw who wrote, You see things; and you say “Why?” But I dream things that never were; and I say “Why not?”
Isn’t it time for us to ask, “Why not?”