Americans Skip Out on $500 Billion in Taxes Each Year

Americans Skip Out on $500 Billion in Taxes Each Year

By Yuval Rosenberg and Michael Rainey
Friday, October 28, 2022

Disturbing news Friday as Paul Pelosi, the 82-year-old husband of House Speaker Nancy Pelosi (D-CA), was hospitalized after being attacked by an assailant who broke into the couple’s San Francisco home. The attacker reportedly shouted, "Where is Nancy, where is Nancy?" The speaker’s office said Pelosi "underwent successful surgery to repair a skull fracture and serious injuries to his right arm and hands" and added that doctors expected a full recovery.

If this was an act of politically motivated violence, the question — again — is whether our system of government will recover from the trends that have fueled such hate and polarization.

Here’s what else we’re watching.

The Annual Tax Gap Rose to $496 Billion — and Is Heading Higher, IRS Says

The federal tax gap —the difference between taxes owed and those collected — rose to $496 billion a year from 2014 through 2016, according to a report released by the IRS on Friday. The shortfall is $58 billion larger than the previous estimate, and the IRS projects that it has grown even greater in the years since, reaching an annual $540 billion from 2017 through 2019.

"The increase in the tax gap estimates reflects that the IRS needs to do more, both in improving taxpayer service as well as working to improve tax compliance," outgoing IRS Commissioner Chuck Rettig said in a statement. (See more on Rettig and his replacement below.)

The IRS analyzes the tax gap every three years. Its new estimate represents an increase of 13% from the $438 billion gap reported for 2011 through 2013. It says that economic growth accounts for the difference, as the estimated tax liability grew by more than 23% from the 2011-2013 period to the 2014-2016 one. The IRS estimates that total annual tax liabilities from 2014 through 2016 came to just over $3.3 trillion, up from about $2.7 trillion for the prior period.

The latest tax gap total includes an estimated $398 billion in underreporting on returns that were filed in a timely fashion, another $59 billion in underpayments (taxes that were reported on time, but not paid on time) and $39 billion in nonfilings.

The IRS estimate means about 85% of taxes were paid voluntarily and on time, a slight improvement from 83.7% in the previous estimate. The IRS said that some $68 billion of the $496 billion annual tax gap eventually will be paid, resulting in a net gap of $428 billion for 2014 through 2016, up from $380 billion.

Independent estimates have suggested that the annual gap has risen far higher than the IRS figures, and Rettig last year told a Senate panel that the actual difference may be close to or even more than $1 trillion a year.

Democrats’ Inflation Reduction Act provided the IRS with funding boost of $80 billion over 10 years, with part of the new money meant to help crack down on tax cheats and tax avoiders. "The recent funding addition will help the IRS in many ways, increasing taxpayer education, significantly improving service to all taxpayers and focusing on high-income/high-wealth non-compliance in a fair and impartial manner supporting compliant taxpayers," Rettig said.

Senate Finance Committee Chair Ron Wyden (D-OR) said that the tax gap report reinforced the need for additional investment in the IRS. "Importantly, IRS acknowledges that it underestimates tax avoidance by the wealthiest Americans and corporations," he said in a statement. "The IRS made clear that the report does not adequately capture sophisticated avoidance schemes favored by billionaires, including partnerships, other pass-through entities, and secret offshore accounts. Here’s a key point: Noncompliance in these areas is extrapolated from audits, and audits in these areas are at historic lows. There’s clearly far more avoidance at the top that IRS needs to pursue."

The IRS Gets a New Acting Chief

Treasury Secretary Janet Yellen on Friday announced that Douglas O’Donnell will serve as acting head of the tax agency after Commissioner Chuck Rettig’s term ends on November 12.

"I want to thank Commissioner Rettig for his tireless service to the American people across two administrations, and his leadership of the IRS during the difficult and unique challenges posed by COVID-19. I am grateful to him for his partnership and efforts to ensure taxpayers had the resources they needed to make it through the pandemic," Yellen said in a statement.

O’Donnell, a 36-year employee of the IRS who rose to the level of deputy commissioner for services and enforcement, will be taking over at a critical time for the beleaguered agency.

After years of underfunding and staffing cuts, the agency was also tasked with the additional responsibility of sending out millions of relief payments during the Covid-19 pandemic. It has struggled recently with customer service and a huge backlog of unprocessed returns. It is set to receive that aforementioned funding boost of $80 billion over 10 years as part of Democrats’ Inflation Reduction Act. That extra money, meant to help improve service, modernize technology and crack down on tax cheats and avoiders, has become the subject of attacks by Republicans, who have claimed misleadingly that the agency’s beefed-up workforce will include an army of agents targeting the middle class. Republicans have pledged to make repeal of the added IRS funding their first priority if they win control of the House.

That kind of criticism is nothing new for the IRS, which has taken fire from both parties. Republicans were infuriated by allegations that the agency had targeted conservative organizations and by a leak of the individual tax returns of some wealthy filers. More recently, Democrats have questioned how the agency came to audit two former leaders of the FBI who had clashed with President Donald Trump. And members of both parties slammed the agency for destroying millions of documents.

Rep. Bill Pascrell, Jr. (D-NJ), the chairman of the House Ways and Means Subcommittee on Oversight, repeatedly called for Rettig to be fired, saying, "The IRS under Donald Trump’s handpicked commissioner Charles Rettig has been one catastrophe after another."

That means that O’Donnell, as acting commissioner, will undoubtedly be at the center of the storm, at least until a permanent commissioner is nominated and confirmed. Yellen portrayed him as a dedicated civil servant. "Deputy Commissioner O’Donnell has dedicated his career to serving American taxpayers through every level of the agency," she said. "His commitment to improving the experience of the American taxpayer will guide his and the agency’s work as they continue their efforts to propel the IRS forward during a critical period of modernization. Now more than ever, the IRS has the momentum to transform with service, technology and workforce improvements that will make it a world-class agency to meet the needs of the American people."

Key Inflation Measure Accelerates Ahead of Next Fed Meeting

Consumer prices and wages are still climbing rapidly, new economic data released Friday show, bolstering expectations that the Federal Reserve will press ahead in its campaign of interest rate hikes at its next meeting on November 1-2.

The Personal Consumption Expenditures price index (PCE) rose 0.3% in September on a monthly basis and 6.2% over the last year, the same rates recorded in August, the Bureau of Economic Analysis announced. Core PCE — an inflation measure favored by the Fed that strips out volatile food and energy prices — increased 0.5% on a monthly basis and 5.1% over the last year, with the annual number increasing in September from the 4.9% rate recorded in August.

A measure of wages tracked by the Labor Department rose, too, though at a slightly slower pace than in the previous report. The Employment Cost Index increased by 1.2% in the third quarter, and by 5.0% over the last year, down from the 5.1% annual rate recorded in the second quarter.

"The level of wage growth is still very high, even if it is moving in the right direction," economist Laura Rosner-Warburton of MacroPolicy Perspectives told The New York Times.

Hard landing ahead? Analysts expect the Fed to again raise rates by 75 basis points next week, followed by a 50 basis-point increase in December. "The modest deceleration in wage growth is surely welcomed by the Fed but won’t prevent a 0.75 percentage point rate hike at next week’s FOMC meeting," said economist Nancy Vanden Houten of Oxford Economics.

Some analysts now think that the Fed will have to push its benchmark interest rate to 5% or even higher in early 2023, though projections by Fed members last month showed rates topping out at about 4.6% and some investors are targeting a top rate of 4.8%. "Core PCE at 5.1% and an Employment Cost Index that remains elevated strongly implies a Fed policy rate that is going to need to move above 5%," said Joseph Brusuelas, chief economist at the consulting firm RSM. "I expect peak in the policy rate by the end of Q1’23."

Whatever the terminal rate, many economists are expressing concerns that the Fed will go too far, sparking a global recession. Three-quarters of economists polled by Bloomberg say they are concerned more about over-tightening than under-tightening "Monetary-policy lags are still underestimated," economist Thomas Costerg of Pictet Wealth Management told Bloomberg. "The full effect of current tightening may not be felt until mid-2023. By then, it could be too late. The risk of a policy mistake is high."

Number of the Day: 880,000

There have been at least 880,000 cases of influenza in the U.S. so far this year, according to new estimates from the Centers for Disease Control and Prevention. About 6,900 people required hospitalization and 360 died, including one child.

Typically running from October to May, flu season arrived six weeks early and is causing a higher number of illnesses. "Influenza is hitting the United States unusually early and hard, already hospitalizing a record number of people at this point in the season in more than a decade and underscoring the potential for a perilous winter of respiratory viruses," says The Washington Post’s Lena H. Sun.

"The data are ominous," William Schaffner, medical director for the National Foundation for Infectious Diseases, told the Post. "Not only is flu early, it also looks very severe. This is not just a preview of coming attractions. We’re already starting to see this movie. I would call it a scary movie."

Chart of the Day

With millions of people stuck at home during the Covid-19 pandemic, U.S. households saved $2.2 trillion more than they would have normally. Former Obama administration economist Jason Furman says households have spent about $700 billion of those excess savings "maintaining consumption in the face of flat/declining real incomes." That leaves about $1.5 trillion in savings still in hand, an amount Furman says could take a year or more to spend down.

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