Race, Tax Enforcement and the Social Compact
Wealthy Americans who avoid taxes for no reason other than to hoard more resources for themselves are an embodiment of a hollowed-out social compact. More precisely, they are an embodiment of a kind of one-sided social compact built on racial and class hierarchies. It’s a system that continues to provide the privileged with roads, clean drinking water, public parks and a wide array of other social services (many of which are submerged beneath layers of private provision) while quietly making it easier and easier for them to stop paying into that very system. Considering that most of the factors that contribute to increasingly unequal pre-distribution income can be boiled down to systems of oppression and sheer luck, this toothless compact is a boon for the privileged few. The pandemic has drawn our many societal ills into sharper relief, and provided a valuable reminder of the power government has to change material conditions if we are willing to spend what is necessary. We are on the brink of decades-in-the making advances against poverty, health inequity and other social ills. As debates about how to pay for this renewed and reimagined social safety net continue to heat up, we would be doing ourselves an immense disservice to ignore the vast sums of money we could raise without reducing benefits, increasing taxes, or adding a cent to the debt.
The U.S. has an enormous tax gap. For each of the years 2011-2013, the IRS estimated that an average of $441 billion in federal taxes owed were not paid voluntarily and on time, and that doesn’t even include offshore accounts and other international tax avoidance. While the government eventually recouped some of this, an estimated annual gap of $381 billion remained. Recently, the Commissioner of the IRS estimated the gap could be as much as $1 trillion a year. That is more than the federal government spends on the entire Medicaid program. So where are the conservatives who claim to care so much about waste, fraud and abuse? Well, they’ve been leading a decades-long charge to erode the government agency responsible for enforcing tax law.
Today, the enforcement arm of the IRS has a 22 percent smaller budget and 30 percent smaller workforce than it did a decade ago. And of the workforce that does remain, an estimated 40 percent will retire within the next two years. The result was not a decade of efficiency gains, but an 81 percent reduction in audits on millionaires, a 52 percent reduction in corporate audits and a 58 percent reduction in audits on billion-dollar corporations.
There might be some consolation if we’d entirely struck the “pay your taxes” article from our social compact, but instead our current system protects wealth (and thus, typically, whiteness) while violently criminalizing low-income people, especially low-income people of color. Steven Dean drew a particularly stark comparison in his piece, “The Truth About Taxes: George Floyd Died, Donald Trump Got Millions.” The title says it all; the same system of tax law and enforcement that allowed a supposed billionaire to pay less in taxes than the average schoolteacher also executed a man in the street over loose cigarettes. George Floyd’s murder is a particularly horrific example of the harm caused by tax enforcement in the lives poor brown and Black people, but that harm is pervasive.
As audit rates on major corporations and wealthy individuals plummet, audit rates for low-income taxpayers remain highly disproportionate. Low-income EITC (Earned Income Tax Credit) recipients were audited at about the same rate in 2018 as the wealthiest one percent of Americans. For those who lack adequate resources, audits can be costly and burdensome. They can disqualify otherwise eligible taxpayers from receiving the EITC, or discourage them from applying in the first place. Perhaps this tradeoff would make sense if EITC recipients were driving the nearly half-trillion dollar annual tax gap but, empirically, this is not the case. The top one percent are responsible for an estimated 30 to 70 percent of the tax gap, while EITC recipients contribute just six percent. The IRS estimated that an extra hour spent auditing someone who earns $200,000 annually (itself much more than an EITC recipient makes) generated only $650, while an extra hour spent auditing someone who makes $5 million or more a year generated around $4,900.27.
These results are predictable. The wealthy owe the most in taxes, so the gap between what is paid and what is owed is greater, as is their incentive to avoid paying. Additionally, the reporting requirements for the income categories where the rich make most of their money – like pass-throughs businesses and capital gains – are far more relaxed than reporting requirements on salaries and wages, the primary source of most people’s income. The IRS has provided proof of the direct relationship between income reporting requirements and voluntary tax compliance.
Compare the attention paid to the EITC error rate and the entire rest of the tax gap. The IRS is required to evaluate the tax gap “periodically.” but their scarce resources limit them to putting out a report every few years. The tax gap figures stated earlier were released in 2019 and even then, they are an estimate of the average gap from 2011-2013. Moreover, the IRS doesn’t have the resources to make any estimates about the enormous amount of taxes that are avoided through offshore accounts and other international tax avoidance.
Conservatives have pushed successive rounds of regressive tax cuts without a single accountability measure for wealthy tax avoiders. But they demand extensive and often burdensome “fraud prevention” provisions when it comes time to increase the still-insufficient EITC or ACTC (the refundable part of the Child Tax Credit that benefits low-paid workers without federal income tax liabilities). The EITC error rate, which itself is partially a byproduct of confusing and convoluted rules designed to ensure not one cent is given to those deemed undeserving, is calculated annually as part of the Treasury’s high-risk series. A 2015 expansion of the EITC and CTC requires the IRS to hold tax refunds until February 15 if a household is claiming one or both of the credits. This blanket suspicion on all refundable credit recipients stands in sharp contrast to the assumed innocence given to wealthy taxpayers.
The racialized demonization of cash assistance in American society continues to cast suspicion on any benefit that can effectively be associated with “welfare.” Studies of the 1996 law euphemistically known as “welfare reform” show that much of the debate leading up to and surrounding its enactment were rooted in racial animus. The racist undertones of the debate are still with us today. For example, in many states there are still “family” caps which were put in place largely due to racist rhetoric that cast Black women and other women of color as lazy and irresponsible people who were having children to cheat the system and collect additional benefits. (Note that this rationale was also used to oppose increasing the EITC to account for family size). Recent research has also empirically validated the connection between anti-welfarism and anti-Blackness.
It’s all the more clear then why conservative politicians have attempted to cast the EITC and the refundable portion of the CTC as “welfare” and somehow separate from legitimate tax policy. In 2003, Congressman Ernest Istook (R-OK), then chairman of the subcommittee with authority over the IRS budget, stated that “[t]he problem is that welfare payments are being mislabeled as tax rebates, [t]o end the confusion, we should stop putting the ‘tax refund’ label on government checks that are actually public assistance.” This sort of skepticism has a history of directly affecting IRS priorities. For example, during the Gingrich revolution of the 1990s, President Clinton cut a deal with the Republican Congress to preserve the EITC by agreeing to dedicate $100 million to “audit applicants for the credit to make sure that only the deserving working poor benefited.”
The intentional hypocrisy we see in IRS enforcement reflects a much larger thread in American history: who we see as criminally suspicious and what we mean when we talk about fraud have always been profoundly impacted by race and class. As we continue conversations about how to address foundational flaws in our criminal legal system, we should remember all inputs to true public safety. When the wealthy are allowed to shirk their end of the social compact by not paying taxes, there are many government priorities that suffer. But when this abdication trickles down to budget cuts in schools, reductions in the number social workers and the like, wealthy tax shirkers are actively harming public safety.
The solution is not to throw more tax cheats in prison (or anyone in prison, but I digress) because the ultimate goal is not to punish, but to fund our priorities and combat a culture that protects whiteness and wealth at the expense of everyone else. Adequately funding the IRS and increasing reporting requirements has the power to increase voluntary compliance and shrink the tax gap without creating new carceral systems. Vitally, this increased scrutiny must be focused on the group that is actually driving the tax gap, not the poor brown and Black communities that have for too long suffered as scapegoats. There is a great opportunity in front of us to make important, long-lasting changes to the way our government supports marginalized families and communities. The American Jobs Plan and American Families Plan are blueprints for a dramatic investment into national infrastructure, including our long-neglected systems of care. Raising progressive revenue is an important part of making sure that these investments are as robust as possible. Making sure the wealthy pay what they already owe is not a silver bullet but it is an important – and relatively straightforward – step in creating the future we want to see.
Sam Washington is a Research Assistant with the Center on Budget and Policy Priorities where they conduct research on the IRS, refundable tax credits and other issues related to inequality in federal tax and budget policy. Sam has a B.A. in Politics, Philosophy, and Economics from the University of Pennsylvania School of Arts and Sciences and is a lifelong resident of Washington, DC.