Golden age of rich America’s tax evasion may be drawing to close 

A trillion here, a trillion there and pretty soon you are talking real money. Were the US Internal Revenue Service to collect all that it is owed under current law, the $1tn yearly shortfall would pay for Joe Biden’s infrastructure bill four times over. Most of this evasion is carried out by the top 1 per cent of US taxpayers — the group that complains most about headline rates. In practice, the rich pay considerably less than advertised.

Rather than increase US tax rates, therefore, Biden’s priority should be to enforce the ones that he inherited. The $1tn annual evasion, which Chuck Rettig, head of the IRS, estimated in testimony to the US Senate this week, does not include the breaks and shelters that make the US tax code so notoriously leaky. Last year, 55 of America’s largest companies, including Nike and FedEx, paid nothing in corporate taxes in spite of collectively making about $40bn in profits.

The headline US corporate income tax rate is 21 per cent, which Biden wants to lift to 28 per cent. However, the official rate is not the point. The effective US corporate tax rate is just 11.2 per cent, which is below that of Ireland. The US Chamber of Commerce and the Business Round Table complain that the nation’s corporate taxes are higher than the western average. In practice, they end up close to the lowest. US tax collections amount to 1 per cent of gross domestic product, compared with a 3.1 per cent OECD average.

All such avoidance is entirely legal. Biden plans to reverse some of this so-called tax base erosion by imposing a global minimum corporate tax. Yet in the absence of a more effective IRS, all that would accomplish is a change of headline. The gutting of the IRS is one of the most under-appreciated stories of the past decade of US government. Since 2011, the agency has lost almost a fifth of its budget in real terms, but roughly a third of its resources relative to GDP. Many of the 17,400 auditors that it has lost were its most experienced.

This has created a perverse situation in which the agency is now statistically as likely to audit Americans who qualify for the earned income tax credit — a negative income tax for people with a median income of $20,000 — as it is to investigate the top 1 per cent. Audits of the poorest are usually automated.

By contrast, it takes time and expertise to sift through the under-reporting or outright tax evasion of people whose income mostly derives from investments. In 2011, almost every single one of America’s top corporations was audited every year as a matter of course. That has fallen to below 50 per cent. Big US companies have enjoyed a golden era of tax avoidance, as have wealthy individuals. This may now be coming to an end.

In last week’s “skinny budget”, the White House proposed boosting the IRS budget by slightly more than 10 per cent to $13.2bn. That would go some way towards bolstering a very demoralised agency. Richer Americans would become warier of being audited. The IRS’s never-ending audit of former president Donald Trump’s history of negative tax payments could actually be wrapped up.

Yet the White House’s proposal is a surprisingly modest increase, given how much bang Biden would get for his buck. Every dollar he puts into the IRS could get up to $10 in return, according to one very credible estimate. Moreover, every dollar in better enforcement would be a dollar less pressure to raise the headline rate. Even if the rebooted IRS could close just a fifth of that gap, it would almost fully pay for Biden’s $2.3tn infrastructure bill.

Properly funding the IRS is the political equivalent of low hanging fruit. Surveys show that a clear majority of Americans, including Republicans, are happy to pay their taxes. What enrages them is the idea that others are not paying their fair share. Anyone who drives round the country has seen suburban gardens with grazing livestock — a tax break meant for actual farmers. They know that tax complexity is a friend of those who can afford lawyers and accountants. At 4m words, the US tax code is four times longer than JK Rowling’s Harry Potter book series — and offers far more scope for wizardry. Now that is a top line worth studying.

edward.luce@ft.com