The myth of wealthy tax evaders

 

IRS success undercuts stereotypes, so why do they still drive policy debates?By Hank AdlerAssistant Professor of Accounting, Chapman University, George Argyros School of Business andEconomicAs millions rushed to file returns by last week's deadline, talk of big changes in the tax systemwere ubiquitous. The Presidential Advisory Panel on Federal Tax Reform continues to hold hearingsbut has already concluded the Internal Revenue Code needs a complete overhaul. Heeding academics andpundits who want to drop the code in favor of a consumption tax, Rep. John Linder, R-Ga., touts abill to replace income, payroll and estate taxes with a 23 percent national sales tax on everything.What's common to these and other calls for change? The contention that the wealthy are evading andavoiding federal income taxes.I believe this is a myth, and that the government is doing the best job of taxing the wealthy sincethe 16th Amendment was ratified in 1913 to allow a federal income tax.The evidence:The number of taxpayers whining about the alternative minimum tax indicates that wealthy taxpayersare paying federal income taxes.Because of "at-risk" rules and "passive income" rules, taxpayers can no longer invest in crazyschemes to reduce their taxes.The ongoing assault by the Justice Department on tax-shelter scams has been very effective. The IRSrecentlyannounced recouping $3.2 billion from the "Son of Boss" tax shelter. New tax-shelter schemeshave virtually vanished.The current confiscatory IRS penalties and interest now leave most wealthy taxpayers uninterested inpadding deductions or underreporting their income.This is not to suggest that drug dealers are reporting their income; no system of taxation is goingto cause people to report illegal activity. But I think a case can be made that overall thiscomplicated system may actually work.Further, Linder's proposed consumption tax is problematic. If adopted, the states would be forced tofollow suit. The result, predicts Bill Gale of the Brookings Institution, would be a totalconsumption tax rate of 50 percent. For a couple living on Social Security plus a small pension whocurrently pay little or no federal or state income tax, their disposable income would be reduced bythe amount of the consumption tax. This could move tens of millions of Americans to the wrong sideof the poverty line.There are five reasons to consider revision of the Internal Revenue Code or the creation of areplacement system of taxation:To decrease tax avoidance, discussed above;To increase or decrease the total tax burden;To achieve a redistribution of the tax burden from one economic class to another;To increase or decrease tax code social engineering such as the deductibility of home mortgageinterest; and/orTo effect tax simplification.But drastic steps aren't necessary to achieve most of these goals.Yes, reducing the social engineering within the code is politically difficult. For most individuals,there is a short list of deductions that dramatically impact their lives: home interest deductions,medical deductions and casualty losses (unexpected damage to property).But an increase or decrease in revenues or redistribution in the total tax burden can be achieved bysimply increasing or decreasing income tax rates. And the mosttransparent way of changing thedistribution of taxes between rich and poor would be to change the tax rates - higher for one group,lower for the other.As for tax simplicity, there are many Internal Revenue Code sections that can and should be combinedand a number that should be eliminated. Almost no one would pay the alternative minimum tax iflawmakers eliminated the tax deduction for all taxes and reduced income tax rates, etc., topercentages where the net federal taxes paid would not change.Beyond this type of change, simplicity generally means opening the tax code to innovativetax-planning activities that can reduce the taxes of the wealthy. But this sort of simplicity iswhat allowed rich taxpayers to pay little or no taxes and what forced legislators to enact at-riskrules, passive loss rules and the alternative minimum taxes.It's plain that any big change to the tax code or change to a different form of taxation must beanalyzed very carefully. A great deal of mischief can occur under the banner of tax simplificationor reform.Copyright 2005 The Orange County Registerhttp://www.ocregister.com/ocr/2005/04/19/sections/commentary/orange_grove/article_486064.php