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The size of illegal tax shelters vs. taxes and wages paid

One of the most shocking tidbits in Robert Kuttner’s new Obama’s Challenge has to do with where Obama could come up with the money to pay for the programs Kuttner recommends. Nearly half the money Obama would need—at least $300 billion—could come from having the IRS crack down on illegal “tax shelters” that are used nearly exclusively by the richest sliver of the American population. In Kuttner’s words, “the consensus among tax experts is that at least $300 billion of taxes owed by the richest Americans go uncollected mainly because IRS enforcement resources have been diverted from audits of tax shelters used only by the wealthy onto audits of working Americans.” (Obama’s Challenge, p. 29; Kuttner cites this report [1] as his source.) This is due largely to the fact that, under President Bush, the IRS has focused its enforcement efforts on “the little guy,” auditing lower-income tax payers and largely ignoring the creative accounting that allows the richest of the rich to avoid paying their fair share. (And that’s on top of the fact that Bush’s tax cuts already give the richest among us a legal free pass to avoid paying a truly fair share.) (See this [2] and this [3] and this [4].) $300 billion in illegal tax shelters being ignored by the IRS! You might wonder, as I did, just how much money is $300 billion? How does it measure up relative to how large our overall economy is? Well, it is 25 times more than all the Federal income taxes paid by families making less than $100,000 (adjusted gross income) in Ohio in 2006. From another angle, it is 25 times more than all the Federal income taxes paid by the 3.5 million non-richest Ohio families in 2006. (Source: IRS, “Tax Year 2006: Historical Table 2 (SOI Bulletin)–Ohio,” [Excel file] [5] found here.) It is 50% more than all of the wages paid to all employees in all occupations in Ohio in 2007 (excluding self-employed). (Source: Bureau of Labor Statistics, Occupational Employment Statistics, “May 2007 State Occupational Employment and Wage Estimates Ohio [6].” It is only slightly less than all wages paid to all workers in the construction industry—throughout the entire United States—in 2007. (Source: Bureau of Labor Statistics, Occupational Employment Statistics, “May 2007 National Industry-Specific Occupational Employment and Wage Estimates: Sector 23 – Construction [7].” So next time someone says—or next time you are tempted to say—“we can’t possibly afford any new government programs,” keep this in mind. If the IRS would only crack down on illegal tax shelters used by the crème de la crème of tax cheats, we’d be sitting one heck of a lot prettier than we have been trained to believe. [Photo courtesy of le Korrigan [8]]