The first step in reforming the U.S. tax system doesn’t involve raising rates or eliminating deductions, say former Treasury Secretary Lawrence Summers and Penn Law professor Natasha Sarin. Instead, the government should concentrate on a task most people would readily agree makes sense: collecting more of the taxes Americans already owe.
Writing in The Washington Post, Summers and Sarin argue that beefing up the IRS so that citizens — especially wealthy ones — meet their tax obligations would raise more than $1 trillion over the next 10 years, while making a dent in the growing problem of wealth and income inequality.
“Our rough estimates suggest that at least 70 percent of the ‘tax gap’— defined as owed but uncollected taxes — comes from underpayment by the top 1 percent,” they write. “This contributes to legitimate concerns that our tax system unfairly advantages the elite.”
The authors say that the tax gap will come to more than $7.5 trillion over the coming decade, and their proposal seeks to capture a modest 15% of that shortfall by enhancing reporting requirements that would affect wealthy households with income that is currently subject to little or no reporting to the IRS. (While employee wages get reported to the tax agency, certain business income, rents and royalties do not.) Currently, only 5% of households earning more than $5 million are audited, representing some low-hanging fruit that could be plucked with relatively modest investments at the IRS, Summers and Sarin say.