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The Very Convenient and Entirely Coincidental Tax Gap Report

Yesterday the Biden Treasury Department issued a report claiming that the Treasury fails to collect $163 billion in taxes annually from wealthy Americans.

In a striking coincidence, this report from the Biden Treasury Department was released just as the Biden administration is asking for $80 billion in new spending to enhance Internal Revenue Service (IRS) collection efforts by hiring new examiners and giving the IRS new power and impose new information-reporting requirements.

If you sense a bit of sarcasm, you’re correct. For decades Democratic administrations have been insisting that there is an enormous “tax gap” of uncollected taxes from upper-income earners, and that the solution is to give the federal government more power, spend more money, and further erode financial privacy for American citizens by imposing ever more financial reporting and disclosure requirements.

Now, there may very well be a tax gap of some size, though it’s almost certain that those who thirst for more tax revenue have every reason to exaggerate it.

As evidence of this, the Treasury report plays games with language, saying that the wealthy “choose not to pay” these taxes. What does that mean?

Under our tax laws, you are allowed to pay as little in taxes as the law allows. You are allowed to “avoid” taxes, but you are not allowed to “evade” taxes. Tax avoidance is a skill, while tax evasion is a crime.

So, Biden Treasury Department, which is it? If you are accusing Americans of tax evasion, prosecute them. But if they are simply avoiding taxes, good for them.

And it’s also worth asking whether an increase in federal power and a decrease in personal financial privacy is a price worth paying in order to extract a relatively small additional bit of tax payments from the American people.

That’s because the dirty little secret has always been that the real money is with the middle class, not the ultra wealthy. Claims that “only the wealthy” will pay additional taxes are always either a complete smoke screen, or at the very least a misunderstanding of how the assets of the wealthy are a small but important part of the overall economy. Their assets aren’t sitting in silos, but rather are at work in the economy providing jobs and opportunity for everyone else.

So if the IRS hires thousands of new examiners, they won’t restrict their inquiries to billionaires. And if new financial disclosure requirements are introduced, they won’t only apply to the wealthy.

We’re highly sensitive to the various excuses used to increase federal power. Assertions of uncollected taxes are common, but voluntary compliance with the tax code is a feature, not a bug, and the more onerous the IRS’s tactics, the more efforts Americans will go to in order to avoid and evade taxes.