Who Evades Taxes? Understanding the U.S. Tax Gap (September 2024)
Americans underpay federal taxes every year. Underpayments are seen across business types, industries, taxpayer ages, and income groups. But some groups are less compliant than others. The presentation will break out these groups and discuss how the IRS estimates the tax gap, possible limitations of these estimates, implications for GDP, and the puzzle of stable compliance rates despite falling audit rates.
Despite numerous efforts to enhance third-party reporting and reduce the tax gap, underreported business incomes in the United States, particularly among pass-through entities, remain significantly high. According to recent data from IRS filings and audit compilations, national accountants at the BEA estimate that 34 percent of pass-through income, approximately $700 billion in 2018, was not reported in tax filings. This research addresses the central issue of financing government spending while accounting for these substantial levels of tax evasion. To tackle this challenge, researchers adopt a broader perspective on estimating the impacts of increased enforcement, considering not only the expected changes in taxable incomes and collections but also the broader effects on the business environment and the macroeconomy.
For instance, heightened enforcement could influence business entry and exit rates, employment numbers, ownership structures, operational scope, legal form choices, and balance sheet composition. In the grander scheme, it is crucial to examine the general equilibrium effects of significant changes such as the IRA, which includes a doubling of the IRS enforcement budget and a targeted focus on high-income returns and complex business filings.
Our speakers:
David Splinter is a senior economist at the Joint Committee on Taxation, U.S. Congress. For over a decade, he has estimated the revenue effects of policy changes to immigration, payroll taxes, and child tax credits. His research focuses on income inequality, income mobility, and tax progressivity—and recently, the distribution of Covid relief and the progressive wage recovery.
Anmol Bhandari is the Carter-Schwab Associate Professor of Economics at the University of Minnesota, where he has taught since 2015. He is also a consultant at the Federal Reserve Bank of Minneapolis and research associate at NBER. He served as president of the Minnesota Economics Association. His research centers on public finance, asset pricing, and quantitative macroeconomics.
