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Brief #112

The Federal Deficit and Uncollected Taxes

Rosalind Gottfried    

Federal Deficit, Tax Cuts, IRS

March 23, 2021  

Policy

Biden’s 1.9 trillion dollar American Rescue Plan is viewed as adding to the already ballooning federal deficit.  Certainly the pandemic has added to that burden but the structural issues go much deeper than the necessary expenditures to address the desperate economic  situation which befell many Americans.  The deficit is expected to reach 35 trillion dollars by the end of the 2021 fiscal year; it stood at 28 trillion prior to the latest stimulus.  In the first five months of the fiscal year the deficit was 68% greater than for the same time in the previous year.

One source of the growing federal deficit can be found in the effectiveness of the Internal Revenue Service (IRS).  The IRS estimates that there will be 600 billion dollars in uncollected taxes this year and 7.5 trillion over the next ten years.  That is more than one half of the projected deficit.  Ninety five percent of taxes from wage earners are estimated to be collected due, in large part, to the way the system tracks wages which makes it hard for these to go unreported.  This is not so with business profit and income from such things as royalties and rent.  There are no mechanisms, at present, to provide third party verification for these sources of income.

A second cause for the anticipated 1.4 trillion dollars of uncollected taxes has its roots in the 2017 tax cuts passed in the Trump administration.  These cuts were touted to help middle income Americans and to boost business investment.  Neither of these things actually occurred.  The insignificant decrease in taxes went unnoticed by most Americans while the greatest gains went to the top 20% of earners.  Corporate tax was reduced to 21% from 35%, a decrease of 31% increasing the budget deficit by more than 50%.  The tax cut’s selling point promised the corporate world would utilize the saving to boost the economy and create jobs.  Though there were some short term gains the rate of economic growth was identical the rate in 2015, showing no permanent gains from the cuts.

Analysis

The IRS sustained budget cuts of more than 20% between 2010 and 2019.  With the loss of personnel, and outdated computer systems, only one quarter of calls for tax help were answered and much tax revenue was lost due to the inability of workers to audit wealthy households.  Improvements in the IRS would cost 100 billion dollars over the next ten years but would yield six times that in tax revenue collected.  Suggestions for better computer system sand more personnel also need to be paired with new systems of tracking in/outflow of funds from businesses.  This could be achieved with systems of verified reporting utilizing banks.

Most Americans, 75%, supported the latest stimulus and many would like to see increased government spending to create jobs and build back the infrastructure.  To do so would take funds and it is clear that the weight of generating these has not been equitably distributed.

Learn More References

https://www.nytimes.com/2021/03/10/opinion/deficits-taxes-biden-infrastructure.html?action=click&module=RelatedLinks&pgtype=Article

https://www.forbes.com/sites/jonathanponciano/2021/03/10/us-budget-deficit-hits-1-trillion-with-more-massive-stimulus-set-to-hike-up-spending/?sh=7bb8fb305525

https://www.npr.org/2019/12/20/789540931/2-years-later-trump-tax-cuts-have-failed-to-deliver-on-gops-promises

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