Claim: The top 1% in the US underpay taxes by $175 Billion annually

Question

According to Robert Reich, researchers estimate that if the top 1% of Americans paid the full amount of taxes they owed, it would raise $175 billion a year. That’s just UNPAID taxes. Not new or higher taxes. Is this true?

Answer 1

This statement is exaggerated or misleading.  From the U.S. Department of Treasury (https://home.treasury.gov/news/featured-stories/the-case-for-a-robust-attack-on-the-tax-gap)

I found the answer in an article by Natasha Sarin, Deputy Assistant Secretary for Economic Policy, on the official government website for the U.S. Department of Treasury.  There is a large number of taxes that the top 1% is underpaying annually, however, it is not proven to be $175 billion.

NATASHA SARIN (Treasury) - Today’s tax code contains two sets of rules: one for regular wage and salary workers who report virtually all the income they earn; and another for wealthy taxpayers, who are often able to avoid a large share of the taxes they owe. As Table 1 demonstrates, estimates from academic researchers suggest that more than $160 billion lost annually is from taxes that top 1 percent choose not to pay.  

Overall, the Administration’s compliance initiatives are guided by a singular objective—bringing about an end to a two-tiered tax system, where ordinary Americans comply with their tax obligations, but many high-end taxpayers do not.

Comments

Interesting take on the situation from an official source. I noticed that mainstream media outlets concur somewhat to the claim though:

https://www.usatoday.com/story/money/taxes/2023/02/21/how-do-rich-people-avoid-taxes/11308215002/
https://www.cnbc.com/2021/09/20/the-wealthy-may-avoid-163-billion-in-annual-taxes-how-they-do-it-.html

Answer 2

The study in question is TAX EVASION AT THE TOP OF THE INCOME DISTRIBUTION: THEORY AND EVIDENCE by John Guyton, Patrick Langetieg, Daniel Reck, Max Risch and Gabriel Zucman

http://gabriel-zucman.eu/files/GLRRZ2021.pdf

The authors use a variety of methods to estimate the amount of tax evasion, including random audits, tax amnesties, and leaks of offshore account information. They find that the top 1% of earners in the U.S. avoid paying approximately 25% of their federal income taxes, which amounts to around $175 billion in revenue lost each year.

While each method has its limitations, the authors acknowledge these limitations and attempt to address them in their analysis. For example, they use statistical models to extrapolate the results from random audits to the population of taxpayers, and they adjust for underreporting and other factors that may bias their estimates.

Overall, while it is impossible to know the exact amount of tax evasion at the top of the income distribution, the methods used in this study are generally considered reliable and provide a reasonable estimate of the extent of tax evasion among top earners in the U.S.

The paper also discusses the various methods that top earners use to evade taxes, including offshore tax havens, pass-through businesses, and underreporting income. The authors suggest that more aggressive enforcement efforts, such as increased audits and penalties for tax evasion, could help to reduce the tax gap and increase revenue for the government.

Comments

Interesting explanation and great job finding the primary source of the claim and extracting relevant information from it. $175 billion still seems like an approximation -- how can the researchers be so sure? Have other researchers come to the same conclusion?