Do-It-Yourself Tax Cuts

By Peymon

I know this breaks your heart, but please take some time to read this report on "Do-it-yourself tax cuts; The crisis in U.S. tax enforcement" report by the Economic Policy Institute, which you will find at http://www.epinet.org/content.cfm/bp160 . The printer friendly version of the Report can be found at www.epinet.org/briefingpapers/160/bp160.pdf (Requires Adobe Reader).

Looks like the micro sized (very small) businesses in America are giving themselves a tax advantage, by not paying income tax, or a lot less than the IRS thinks they should! The system is failing of its own dead weight and they know it. Below is a most telling part of the Report:

”Components of the tax gap”
Most of the tax gap -- $250 to $292 billion -- is founded on the underreporting of net income (i.e., reporting too little income and/or too many deductions). A smaller portion of this tax gap is due to non-filing ($30 billion) and underpayment ($32 billion). Nearly all of the estimated non-filing and underpayment pertains to the individual income tax.

In the underreporting category, the taxes most often underreported are: individual income (between $150 and $187 billion), corporate income ($30 billion), payroll ($66 to $71 billion), and estate and excise ($4 billion).

Within the income tax category, about half of the gap is due to underreporting of business net income. Lesser shares are due to underreporting of non-business income, and less still to incorrect reporting of deductions, exemptions, adjustments, and credits ($25 billion). In the payroll tax category, the bulk of non-compliance is attributed to the self-employed ($51-56 billion).

Confidence in these estimates varies, given the spotty character of available data and the idiosyncratic difficulties in analyzing assorted components of the gap. Estimates of the largest pieces--underreporting of business income, corporate income, and self-employment income--used to be considered the less-reliable estimates; presumably with the new NRP data, confidence has improved.

Considered in terms of the percentage of dollars lost by tax category, the three leading categories are self-employment tax (nearly 60%), corporate income tax (over 40%), and the estate tax (over 20%).

Another breakdown is by "visibility" categories within the individual income tax. The vast bulk of underreporting is attributed to non-farm proprietors, rents and royalties, farm income, and informal suppliers ("proprietors who operate in an informal business style," which includes street merchants and the like), among other areas. These types of taxpayers are required to conduct "little or no information reporting" of their financial affairs."