The wealthiest US persons are often far more adept at sheltering their income from the tax authorities than previously predicted, a report says. With a drive to raise revenues to fill massive public finance gaps, such avenues are likely to be squeezed.

US policymakers are discussing how the top echelon of wealthy US citizens avoid paying more in income taxes than authorities had previously assumed, the Wall Street Journal reported, citing upcoming estimates from the Internal Revenue Service and academic economists.

A National Bureau of Economic Research working paper reckons that 1 per cent of households fail to report about 21 per cent of their income, with 6 percentage points of that due to strategies that random audits don’t detect. For the top 0.1 per cent of such taxpayers, unreported income may be nearly twice as large as conventional IRS methodologies would suggest.

The report said that such techniques offshore tax avoidance, although reporting requirements have made this harder over the past 10 years. The report said that many high-income Americans also use partnerships and similar entities to avoid taxes; such behavior may be increasing and becoming harder for tax authorities to find and tackle.

With tax hikes almost a certainty under the Biden administration and Democrat-led Congress, the fact that some HNW US citizens can avoid a chunk of tax is politically sensitive, although hardly surprising perhaps to seasoned observers of tax rules. In the past, advocates of “flat taxes”, such as the CATO Institute, argue that they are ultimately fairer because there is far less incentive to dodge them, and they are far cheaper to collect.

The WSJ report that “pass-through businesses” - where income passes directly onto their owners’ individual tax returns and isn’t taxed at the corporate level – are an increasingly important part of the wealth of the top 1 per cent of taxpayers.

The report said that IRS Commissioner Charles Rettig briefly referenced the research in a recent congressional testimony as he urged lawmakers to give the agency more money for enforcement.

(Editor’s note: It isn’t surprising that under-reporting of income goes on; the US tax code is complex and provides many ways for taxpayers to shelter from the IRS – entirely legally. Instead of engaging in an endless campaign to penetrate such tax shelters, a better idea might be for lawmakers to simplify the tax code, cut rates and remove loopholes and exemptions. Such a move wouldn’t make this publication very popular with tax advisors, obviously, but it would arguably boost overall economic growth and efficiency and cut out a huge pile of bureaucracy. Unfortunately, the actual trend will be toward even more rules and regulations, and even more ingenious ways to finagle the system.)