U.S. owed $1T in unpaid taxes; here's how to collect it
By Karl W. Smith / Bloomberg Opinion
The U.S. budget deficit for fiscal 2023 ending Sept. 30 was an eye-watering $1.7 trillion. Any pragmatic politician knows that reducing such a massive shortfall will require some combination of higher taxes and spending cuts. But before we demand more from hard-working families and individuals, we need to ask a fundamental question: Is Uncle Sam doing his best to collect what’s already due?
The latest Internal Revenue Service estimates are the that almost $700 billion in taxes went unpaid in 2021. This figure, called the tax gap, is the difference between what Americans owed and what the government collected. This estimate, however, is based on outdated assumptions about how the economy runs. Former IRS Commissioner Charles Rettig puts the true tax gap at more than $1 trillion, which is more than half of what the U.S. needs to close the budget deficit.
Here’s the pinch of salt in our fiscal wound: Half of this tax gap is tied to so-called pass-through entities, such as sole proprietorships, partnerships and LLCs. Unlike corporations, these entities aren’t required to file a single tax return that covers their business. Instead, the owner or owners are expected to report business income on their own individual tax returns. It’s unclear why this group is underpaying its taxes, but the reasons probably range from outright cheating to issues related to complexity in filling out returns.
When the rules for pass-through entities were created, the thinking was that they would mostly apply to small businesses that couldn’t afford to comply with the same complex tax filing rules designed for big corporations. Times have changed. Back in 1980, pass-through entities represented just over 20 percent of business income; by 2015, that figure had ballooned to more than 60 percent. Global manufacturing giants and Wall Street hedge funds are structured as pass-through entities, in large part because such entities enjoy easier reporting requirements and lower tax rates than corporations.
https://www.heraldnet.com/opinion/comment-u-s-owed-1t-in-unpaid-taxes-heres-how-to-collect-it/
