As we stumble through our 2020 income tax filings (note: due by May 17 this year), there's always the realization that many don't pay their fair share, if any at all, through fraud. The New York Times editorial today delves into the major flaw in the tax system that puts the tax burden on wage and salary earners:
"The withholding system remains the cornerstone of income taxation, effectively preventing Americans from lying about wage income. Employers submit an annual W-2 report on the wages paid to each worker, making it hard to fudge the numbers.
But the burden of taxation is increasingly warped because the government has no comparable system for verifying income from businesses. The result is that most wage earners pay their fair share while many business owners engage in blatant fraud at public expense.
In a remarkable 2019 analysis, the Internal Revenue Service estimated that Americans report on their taxes less than half of all income that is not subject to some form of third-party verification like a W-2. Billions of dollars in business profits, rent and royalties are hidden from the government each year. By contrast, more than 95 percent of wage income is reported.Unreported income is the single largest reason that unpaid federal income taxes may amount to more than $600 billion this year, and more than $7.5 trillion over the next decade. It is a truly staggering sum — more than half of the projected federal deficit over the same period.The government has a basic obligation to enforce the law and to crack down on this epidemic of tax fraud. The failure to do so means that the burden of paying for public services falls more heavily on wage earners than on business owners, exacerbating economic inequality." (our emphasis)
A proposal to aid enforcement of tax laws and crack down on cheaters among business owners includes requiring banks to provide the IRS with an annual report on a business' "inflows and outflows" to compare with their individual tax filings. If you have investments, the bank report would be comparable to the 1099 tax forms you and the IRS are provided by the investment company. It's about verification.
One thing is certain, however, since it would promote equity among tax payers and hit the wealthiest business owners who routinely underreport their business income, the Republican / Trumpist party will resist fixing it with all their might.