SUMMARY Estimatd Futur Tax Evasion undr th Incom Tax Systm and Prospcts for Tax Evasion undr th FairTax: Nw Prspctivs By Richard J. Cbula, Ph.D. Fiorntina AngjllariDajci, Ph.D. March 1, 2017 Purpos of Study 1. Th Evasion study xamins tax vasion, looking at historical rats of vasion and thn stimating futur tax vasion ovr th nxt dcad, 2017 to 2026. a) Th authors focus on th undrrporting of incom. Thy compar total prsonal incom as drivd by th U.S. Burau of Economic Analysis and containd in th National Incom Product Accounts (NIPA) 1 to total incom rportd to th IRS containd in th Statistics of Incom data: BEAdrivd Adjustd Gross Incom to IRS Adjustd Gross Incom. Historically, th undrrporting of incom had a low of 8.4% in 1967 and rachd a high of 14.8% in 2005. (Th last yar BEA conductd th study). 16 14 12 10 8 6 4 2 Figur 1. BEA Drivd AGI Gap Prcntag of Total AGI, 19502005 8.4 0 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 14.8 b) Th authors nxt stp is to forcast incom tax vasion in th form incom undrrporting th AGI Gap. Thy us thr diffrnt growth rats: vasion growing at th rat of inflation (2.703%), vasion growing at th rat of th nominal GDP growth rat (4.85%), and vasion growing at th historical vasion growth rat of (7.034%). 1 NIPA is th sam data that is usd to stimat taxabl consumption undr th FairTax. 1
Tabl 4 shows that th total AGI Gap (incom undrrportd to th IRS) ovr th nxt dcad is $32.730.3 trillion for 20172026. This amount is 77.4%81.4% largr than th siz of US GDP in 20152016 ($18.04 $18.45 trillion in currnt dollars). Tabl 4. Nw Estimats of th AGI Gap in Currnt Dollars Using Altrnativ Actual Annual Prcntag Growth Rats (% GRs), 20172026 Tax Yar Inflation NGDP GR AGI Gap GR (2.703%) (4.850%) (7.034%) 2017 1,622.10 1,901.80 2,365.10 2018 1,665.90 1,994.00 2,531.50 2019 1,711.00 2,090.70 2,709.60 2020 1,757.20 2,192.10 2,900.20 2021 1,804.70 2,298.40 3,104.20 2022 1,853.50 2,409.90 3,322.50 2023 1,903.60 2,526.80 3,556.20 2024 1,955.10 2,649.30 3,806.30 2025 2,007.90 2,777.80 4,074.10 2026 2,062.20 2,912.50 4,360.70 2017 to 2026 $18,343.30 $23,753.40 $32,730.30 Sourcs: BLS, BEA and BEA s Ldbttr (2004; 2007) Tabl 5.1 shows th lost incom tax rvnus, Incom Tax Gap, which is calculatd by multiplying th projctd undrrportd incom in Tabl 4 tims 20.66%, th avrag fdral incom tax rat. Tabl graphd in Figur 3. Tabl 5.1 Estimatd Incom Tax Gap, 20172026, Billions of Currnt Dollars, Fdral Incom Tax Rat of 20.66%* (1) (2) (3) Inflation NGDP GR AGI Gap GR Tax Yar (2.703%) (4.850%) (7.034%) 2017 335.1 392.9 488.6 2018 344.2 412.0 523.0 2019 353.5 431.9 559.8 2020 363.0 452.9 599.2 2021 372.9 474.9 641.3 2022 382.9 497.9 686.4 2023 393.3 522.0 734.7 2024 403.9 547.4 786.4 2025 414.8 573.9 841.7 2026 426.0 601.7 900.9 2017 to 2026 $3,789.7 $4,907.4 $6,762.1 *Sourcs: Tabl 9; IRS (1996, p. 9; 2016, p. 2) Th anticipatd Individual Incom Tax Gap to b facd by th IRS falls in th rang of btwn 3.8 trillion and narly 6.8 trillion dollars. 2
1,000 800 600 400 200 Figur 3. Estimatd Incom Tax Gap, 20172026 (Billions of Currnt Dollars) 489 523 560 599 641 686 735 786 842 901 393 412 432 453 475 498 522 547 574 602 335 344 353 363 373 383 393 404 415 426 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Inflation (2.703%) Nominal GDP Growth Rat (4.850%) AGI Gap Growth Rat (7.034%) c) Th authors compar th forcastd incom tax vasion to total incom tax rvnus, again using th thr diffrnt growth rats. On avrag, th annual shar varis from 16.2% to 34.2% for th tim priod from 20172026. Individual Incom Tax vasion from 2017 to 2026 will prsist abov th 16% lvl. Basd on historic growth rats (which is th mor likly to occur scnario), incom tax vasion will grow from 29.3% of incom tax rvnus in 2017 to 34.2% by 2026 xcding on third of incom tax rvnus. P r c n t 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 Figur 4. Individual Incom Tax Evasion as a Shar of Projctd Individual Incom Tax Rvnus, 20172026 29.3 29.4 29.8 30.4 31.0 31.6 32.3 32.9 33.5 34.2 23.6 23.1 23.0 23.0 22.9 22.9 22.9 22.9 22.9 22.8 20.1 19.3 18.8 18.4 18.0 17.6 17.3 16.9 16.5 16.2 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Inflation (2.703%) Nominal GDP Growth Rat (4.850%) AGI Gap Growth Rat (7.034%) d) Th nxt stp is to look at th history and gnrat a forcast of what is gnrally known as th IRS Tax Gap this is th taxs owd but not paid timly. It consists of nonfiling, undrrporting, and undrpaymnt. It includs all fdral taxs: individual and businss incom taxs, payroll taxs, capital gains taxs, stat taxs and xcis taxs. 3
Total tax vasion (all fdral taxs) will incras from yar to yar and basd on historic trnds will incras from an stimatd 20.2% in 2017 to 23.6% in 2026 of gross tax rvnus by 2026. Basd on historical trnds, cumulativ tax vasion from th fdral incom tax systm ovr th nxt dcad (20172026) will rach about 9 trillion dollars. Figur 5. Estimatd Gross Tax Gap, 20172026 (Billions of Currnt Dollars) 1,400 1,200 1,000 800 600 400 1,111 1,179 1,047 987 931 877 780 827 848 889 932 977 470 483 496 510 523 537 552 567 582 598 614 631 648 665 683 702 638 669 701 735 771 809 486 515 547 580 615 653 693 735 200 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 Inflation (2.703%) GDP Growth Rat (4.850%) Historical Gross Tax Gap GR (6.087%) ) As with th incom tax gap, th Total Tax Gap as a % of Total Taxs is computd. Basd on historic trnds, th Total Tax Gap, on avrag, as a prcnt of total tax rvnu, will incras from yar to yar starting at 20.2% and raching 23.6% by 2026. Figur 6. Gross Tax Evasion Shar of Projctd Gross Tax Rvnus P r c n t 30.0 25.0 20.0 15.0 10.0 5.0 20.2 20.4 20.8 21.2 21.7 22.1 22.5 22.9 23.3 23.6 18.6 18.6 18.7 18.9 19.1 19.2 19.3 19.4 19.5 19.6 16.1 15.7 15.5 15.3 15.2 15.0 14.8 14.5 14.3 14.1 2016 2018 2020 2022 2024 2026 2028 Inflation (2.703%) GDP Growth Rat (4.850%) Historical Gross Tax Gap Growth Rat (6.087%) 4
f) Th authors comput th amount of tax burdn that is ffctivly shiftd from th tax scofflaws to thos who pay thir taxs. This is don by dividing th Total Tax Gap by th numbr of housholds for that yar. Th yarly population forcast was dividd by 2.53 (th avrag prsons pr houshold) to gt th numbr of housholds. Basd on th historical growth of th gross tax gap, th avrag tax burdn shiftd pr houshold grows from $5,365 in 2017 to $8,526 in 2026. This surtax nabls th fdral govrnmnt to rais th sam lvl of rvnu it would collct if all taxpayrs wr to rport thir incom and pay thir taxs in full. 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Figur 7. Annual Avrag Tax Burdn Shiftd to U.S Housholds Du To Tax Evasion (Currnt Dollars) 5,365 5,646 5,942 4,942 5,140 6,255 6,584 6,932 7,298 7,685 8,094 5,347 5,563 5,787 6,022 6,266 6,522 6,788 8,526 4,276 4,356 4,439 4,523 4,609 4,698 4,789 4,882 4,977 5,075 7,067 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Inflation (2.703%) GDP Growth Rat (4.85%) Historical Gross Tax Gap (6.087%) Th cumulativ tax burdn shiftd from tax scofflaws to compliant taxpayrs amounts to a total stimatd burdn of btwn $46,623 and $68,328 ovr th tnyar priod from 20172026, which is comparabl in siz, if not gratr, undr th historical growth rat scnario, to both th mdian and man houshold incom in th U.S. in 2015. In othr words, in on out of th 10 yars ahad ach Amrican houshold will b working solly to pay off th 10yar ovrall surtax arguably a havy burdn for vry houshold. 2. Th study looks at various trnds in th conomy and whthr thy would tnd to incras or dcras tax vasion. 3. Modl of transactions costs associatd with th dcision to vad th FairTax: tim and nrgy, a conscinc cost (knowing that you ar doing wrong), potntial cost of pnaltis if caught, and th cost of finding somon to collud with you and agr not to collct or pay th tax. 5
4. Practical considrations of th FairTax rducing vasion: 80% rduction in numbr of tax filrs, and th dominanc of larg companis in th wholsal and rtail sctors. Tabl 13 shows that whil small businsss mak up 64.7% of wholsal and rtail trad corporations, thir combind businss rcipts rprsnt only 2.1% of total wholsal and rtail trad businss rcipts. Tabl 13. Distribution of Wholsal and Rtail Trad Corporations by Siz of Businss Rcipts, 2012 Siz of Businss Rcipts Total Rturns Businss Rcipts Prcnt of Rturns Prcnt of Rcipts (Mony amounts thousands of dollars and siz of businss rcipts is in whol dollars) Undr $25,000 147,400 $784,540 15.40% 0.00% $25,000 to $100,000 106,865 $6,104,331 11.10% 0.10% $100,000 to $250,000 145,023 $24,100,652 15.10% 0.30% $250,000 to $500,000 126,027 $45,284,628 13.10% 0.60% $500,000 to $1,000,000 121,775 $86,165,220 12.70% 1.10% Small Businss Subtotal 647,090 162,439,371 67.40% 2.10% $1,000,000 to $2,500,000 137,559 $219,076,744 14.30% 2.80% $2,500,000 to $5,000,000 73,809 $259,165,989 7.70% 3.30% $5,000,000 to $10,000,000 42,293 $297,656,068 4.40% 3.80% $10,000,000 to $50,000,000 45,979 $954,027,758 4.80% 12.20% $50,000,000 to $100,000,000 7,111 $497,301,653 0.70% 6.40% $100,000,000 to $250,000,000 3,741 $557,800,877 0.40% 7.10% $250,000,000 or mor 2,167 $4,862,482,246 0.20% 62.30% Total Activ Corporations 959,749 7,809,950,706 100.00% 100.00% Sourc: Calculations basd on IRS, RETURNS OF ACTIVE CORPORATIONS, Tabl 5Slctd Balanc Sht, Incom Statmnt and Tax Itms, by Sctor, by Siz of Businss, Tax Yar 2012. All figurs ar stimats basd on sampls. 6