Closing the Tax Gap

Finance, Taxation and IRS Oversight: Closing the Tax Gap: Lost Revenue from Noncompliance and the Role of Offshore Tax Evasion, May 11, 2021

WM: Special Revenue/Oversight: Minding the Tax Gap: Improving Tax Administration for the 21st Century, June 10, 2021

The Administration has requested $80 Billion to enable the IRS to go after an estimated net gain of $700 Billion, or $780 Billion in gross collections. This sounds like a good deal. The only reason to oppose this is the belief that tax cheating is a civil right. Sadly, this may not be far from the truth. By all means, this money should be spent, as the scheduled witnesses will like affirm.

There is an easier way to recoup these funds while ending the requirement to file taxes for 97% of households who are not filing business taxes. Please see the attachment for more information on how this may be done. 

Businesses would pay a subtraction VAT, with a first tier meant to fund the child tax credit, paid leave, childcare, health care, social services and education (including a state administered tax). Ideally, at the federal level, no revenue would be collected because employers would provide these services in lieu of tax payment. 

Higher tiers of the subtraction VAT would collect taxes on salaries with a 6.5% rate on income over $85,000, with incemements of that amount to a top rate of 26% starting at $340,000 in salaried income. Salary surtaxes, with an option to purchase tax prepayment bonds, would start at $425,000 at 6.5% to a top rate of 26% starting at $680,000. 

A credit invoice value added tax to fund what is now collected through the employer contribution to Old Ages, Survivors and Disability Insurance (credited equally for all workers) and discretionary military and civil spending in the continental United States.

Taxes on salaries can be collected by employers without having to file because taxes on capital income and gains would be funded separately. Rental and capital gains on real property would be collected by states and capital gains and income from financial assets would be collected by the federal government, with funds remitted by brokers or trading platforms directly to the Securities and Exchange Commission. 

Sales of stock (publicly traded and privately held) to qualified Employee Stock Ownership Plans would be zero rated. Sales of real estate sold to ESOPs or cooperatives would be zero rated at the state level. Shares would be marked to market when information on sale prices is lost, when stock options are exercised and at the first sale after inheritance, gift or charitable donation. Self reporting will not occur, ending non-compliance due to strategic record keeping.

Parking money offshore to avoid taxes can be easily dealt with if we the desire to do so (see again my comments on tax cheating). Subtraction Value Added and Credit Invoice taxes will pull in most revenue - both from labor and profit within the enterprise where the costs are incurred or the goods and services are provided. Even medical services provided remotely (as my last x-ray was) would be subject to tax. 

This applies to headquarters location as well. Correspondence and revenue will be credited where the correspondence is opened and presented at the physical location of the home office. I am sure there are legislative drafters among committee staff who can iron out ironclad language. It is time to let them.

The biggest tax shelter is the use of money market funds to accumulate capital gains and income without taxation. This practice must end if salary surtaxes no longer include non-salaried income. 75% of such funds are held by the top 10% of households as measured by the 2019 Survey of Consumer Finance by the Federal Reserve.. I suspect the other 20% are held by high income retirees. The working class will not be harmed. 

This ratio affirms what Pareto found, except his ration was 80% of wealth held by 20% of asset holders. Clearly, things have gotten worse for the 80th to 89.9th percentile. If you apply the Pareto rule to higher levels of income, and with Berkshire Hathaway there is no reason not to, the top 1450 households hold roughly 30% of all wealth in mutual funds. This ratio also applies to bond holdings, but this is a topic for another day.

This finding also takes away the excuse used to shift retirement income from defined benefits to defined contributions. The only people who benefit more from such arrangements are brokers. The relationship between investment bankers, brokers and ratings agencies makes scenarios about how defined contribution reserve requirements are calculated suspect at best and likely unethical, if not criminal. This ranks up there with using inside information to make electronic trades. At least there, an Asset VAT of 26% should end this practice.

We have left a loophole on Asset Value Added Taxes that some will be able to fly a 757 through, which is trading stock overseas to avoid taxation. The only way out of this is an internationally negotiated asset VAT rate, or at least the same range. This ends the need for a minimum tax on corporate income (note that corporate income taxes will be discontinued under this proposal).

Ending the mutual fund shelter and levying an Asset VAT gets at all of the income and gains that wealth taxes are proposed to capture, or rather, it limits the accumulation of gains and income that is currently sheltered. 

Attachment Tax Reform

FYI International Tax Policy

FYI Wealth Tax Hearings