Are You Focused on the Right Tax Scandal?

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If you've had your TV on or a newspaper or news website open in recent weeks, you've likely heard about a big scandal surrounding the Internal Revenue Service. It seems that the IRS has been taking a closer look at certain conservative groups, and critics are crying foul at the targeting.

Go ahead and be outraged at this scandal, if you're so inclined. But permit me to suggest that perhaps you should be even more outraged by some other tax-related controversies that I think are equally scandalous. Some have even been highlighted by our National Taxpayer Advocate, Nina Olson, who urges Congress every year to fix critical problems.

Let's start with the tax code itself. It has kept growing over the years and is now roughly 4 million words long. That reflects its great complexity, which requires taxpayers and businesses to spend lots of time and/or money figuring out tax issues and preparing returns. Olson has estimated that the total cost of compliance was $168 billion in 2010. That's rather scandalous, don't you think? It amounts to about $530 for every man, woman, and child in America. It costs a lot in time, too -- about 6.1 billion hours, annually, for people and companies. The massive complexity of our tax code is wasteful and costly.

Corporate tax avoidance
Meanwhile, lots of companies have been paying surprisingly little in taxes, by taking advantage of various loopholes and permitted strategies. It's easy to be outraged that Apple is "sidestepping" paying billions in taxes. But Apple and many other companies have been employing legal strategies. In other words, our 4-million-word tax code permits them to avoid taxes -- for example, by keeping much income earned abroad outside U.S. borders. Apple recently held about $74 billion of its $110 billion in cash and investments overseas. Microsoft's overseas cash and investments recently totaled $50 billion. Cisco Systems: $42 billion. While the corporate tax rate is currently 35%, and a reasonable case can be made that that's too high and hurts our global competitiveness, many major companies have not been paying anywhere near 35%. It's estimated that more than a trillion dollars is being held overseas. Clearly, if that were to return home and be taxed, it would generate substantial revenue.

Individual tax avoidance
It's not just companies that aren't paying as much as they might. The U.S. has an "underground" economy in full swing, where lots of workers are earning money they don't report as income and therefore never pay taxes on. This includes illegal activities such as drug-dealing, selling stolen items, and prostitution, but also includes many construction workers, nannies, tutors, yoga teachers, and others who are sometimes paid off-the-books. The total income not reported? It's estimated to be around $2 trillion. The taxes that are therefore never collected? That's estimated to be between $450 billion and $500 billion. 

Reducing collection power
Meanwhile, there are often proposals to cut the IRS' budget, and some cuts actually happen. The recent sequester, for example, is cutting $600 million from the IRS budget. That won't result in your owing any less in taxes. But it does mean that the IRS will be able to collect less in tax revenue. Consider that about $345 billion owed to the IRS each year is never collected. Consider, too, that the IRS collects about $200 for every dollar that it costs to run the agency. If Congress were smart about it, the IRS would get more money, to collect more tax revenue, which our nation could certainly put to good use -- for fixing roads, improving education, and all kinds of other good purposes. Cutting IRS funding is essentially turning off some cash-spewing spigots. 

There are plenty of other problem areas in the tax area, and many of them, like the ones above, are costing us great gobs of much-needed money. Don't let the media keep you focused on just one scandal -- learn more about what's going on and consider letting your representatives in Washington know what you think.

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