This week, I am going to talk about taxes- and for what they are used.
Let’s start off with a really big problem. One that everyone (including the IRS) tries to hide under the rugs of their offices.
First a simple fact.
Most of Americans are paid wages. They sell stocks (or own mutual funds that generate taxable revenue). All these items are fully reported to the IRS. So, the average American reports all his income- and pays his (or her) fair share of taxes.
But, now let’s consider a few other folks.
Johnny runs a business fixing computers. He is not incorporated. And, he may or may not report all the income he receives- because he rarely if ever bills clients more than $ 600 a year, so he never gets a 1099, which is how the IRS can verify how much revenue he receives. (NOTE and COUNTERPOINT: This is why the IRS now requires all credit card processors to provide a 1099K to those businesses that use their services. In an effort to stop firms from not reporting revenue!)
Linda has a consulting firm. It’s an LLC operating as a small business. Her income is reported on Form 1120 S, but she has wide latitude in determining what expenses can be charged against that income, thereby reducing the taxable components.
Juanita and Jose run a cleaning company. It’s an LLC. They have a dozen folks helping them- five are true employees, the others are considered contractors. Except…these contractors really are employees, going to all the locations where Juanita and Jose send them, using company equipment, etc.
Which means Johnny, Linda, Juanita, and Jose do not report all the taxable income they receive. Moreover, Juanita and Jose do not pay into the Social Security/Medicare system on behalf of their “contractors”. Unless and until the IRS or the Department of Labor comes knocking at their doors, some 15% of wages paid these “contractors” never make it to the federal coffers.
As you can see, more 95% of all wage, interest, and dividend income is fully reported to the IRS. The other income- for those that business owners accrue- amounting to some $ 600 billion unreported income a year (which will accumulate to about $ 7.5 trillion over the next decade)- simply involves blatant fraud. It’s not reported.
I’m not making this up. As a matter of fact, one of our IRS Administrators, Charles Rossotti (1997 through 2002), knows this to be a fact. And, as the past Administrator of the IRS, he would know.
Rossotti (along with Larry Summers [Harvard prof, ex Treasury Secretary] and Natasha Sarin [Pennsylvania Law prof]) want the US to develop a third-party verification system for business income. One of the components they suggest- have banks notify the IRS of annual inflows and outflows from business accounts maintained at US banks. Not all of those funds would be taxable- the taxpayer can identify which funds were gifts or loans, for example.
But, they want the US to invest in IRS infrastructure- to the tune of about $ 100 million over the next 10 years- along with business income transparency- so that at least $ 1.4 trillion in taxes can be collected. (You do see the multiplier effect, right?) They recognize this would be more effective than raising the tax rates on the rich. (It IS the rich that receives so much of the unreported income.) So do you, now, right?
The ‘Underground Economy’ to which you refer is well known and a real problem. It means that a large population is not contributing and has little interest in how our tax money is spent. [RAA: this is the economy of the rich- not the poor, as you wish to purport. ] Worse, many of the participants are also receiving welfare checks because they supposedly have no income. [RAA: An assertion without proof. Please limit discussion on this site to facts.] Over 47% of payors working-age “citizens” (not including the uncounted illegals) pay NO income taxes. [RAA: These are the folks BELOW the poverty line. You should fix your statement in that they do pay Social Security and Medicare taxes- to the tune of 7.65% of their income, which is a pretty steep burden for those below the poverty line.] The “rich” (those earning over $217,000/year) pay over 60% of all federal income taxes and comprise only 6% of all taxpayers! [RAA: this number is absolutely incorrect. Look at the chart in my blog- you will see that income taxes are only 45% of US collections, and payroll is another 45%. And, the rich pay a VERY low percentage of their overall income. The middle class pays the highest percentage of its income as income taxes.] The top 1% pays over 40% of all FIT! [RAA: At best the top1% pay 26% of their income as tax, nowhere the burden they claim in public.]
Taxpayers doing most of the griping pay an effective rate of around 16%! {RAA: See the rate the rich pay in the line above.]
This might be a good argument for the Flat Tax championed by Steve Forbes.
That a lot of $$ the government wants us to invest.
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