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Friday, April 14, 2006

Taxes, Damn Taxes and Statistics

EPI's new book on tax avoidance and evasion and the IRS Bridging the Tax Gap yields confirmation of what you already knew, only it's more so.

* Tax avoidance up, IRS staffing and budget down. Between 1992 and 2001, FTE positions decreased by 20,000. The IRS oversight panel wants a 13% increase this year. Bush has budgeted 4%.

* The average audit rate in 1978 was 2.15% for individuals. In 2002 (the book's data year), the rate was .65%. The average cost of an audit is $1,300. The average yield is $71,000.

* Tax shelters. Shift your income to categories with low rates, shift your deductions to circumstances where rates are high. The enormous cost of compliance professionals may be half accounted for by tax avoidance professionals [my thought]. The demise of Arthur Anderson after the Enron fraud apparently was as much a warning to the IRS as to accounting firms. Tax shelter fabricator KPMG has been indicted, but penalties sought are not as high as they might be, maybe on the premise that the firm is too big to let fail.

* The so-called "AGI Gap," the difference between adjusted gross income measured by the IRS and that gathered by other sources and reported in NIPA (National Income and Product Accounts), is nearly one trillion dollars. By far the largest gap is in the problem child "nonfarm proprietors," $400 billion.

* The great brouhaha of the late 1990s led by Senator William Roth (R-DE) painted the IRS as a modern day inquisition. The upshot was A Taxpayers Bill of Rights. Subsequent investigation by the GAO has failed to substantiate the horror stories.

* Economically, the complexity of the code favors evasion and avoidance, duh, and it may be that legal avoidance is more damaging to the economy than the criminal evasion.

Since you're fried on taxes today, we'll leave it at just those few bullets. The book is much fuller than this sampling. It includes interviews with former commissioners and an academic economic treatment at the end.

Suffice it to say complexity is unnecessary, useless and distortionary. Mining the tax system as a form of employment would dry up overnight with honest taxation. And lastly, for tonight, the pork that gets so many headlines is chump change compared to the giveaways to corporations and rich individuals through the tax system