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For the week ahead of Tax Day 2011, Demos published daily writings, infographics, and illustrations that provided a fresh perspective on how we think about taxes.

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All work will be hosted at OurFiscalSecurity.org and is republishable with attribution.

Contact mhirsch@demos.org for high-resolution images.

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Giving Meaning To Taxes

Over the last week the media—from blogs to major news outlets—have commiserated with all of us who must complete our tax returns by midnight tonight. They have run commentary and analyses on who pays how much in taxes. They speak of billions and trillions. They mention loop-holes and population quartiles. They lament how complicated the tax structure is. They feature high-profile spokespeople for whom tax season is the perfect opportunity to fan the anti-tax and anti-government flames.

In most of this coverage, Americans are cast as victims. We are taxpayers bearing up under the obligation to pay into federal and state coffers. Some are stoic in the face of the inevitability of “death and taxes,” while others burn with resentment. We dread the task of hauling out that folder of receipts and calculating just how much of our income we have to hand over to Uncle Sam.

All of these stories reflect aspects of tax season reality for Americans. What is missing from this picture is any sense of a larger meaning in the act of paying taxes. Most other things that require effort and sacrifice—family, service, charity, and volunteerism—have virtuous, or at least redeeming, meaning associated with them. That meaning helps us face life’s challenges with a sense of a larger purpose that makes these acts worth the sacrifice.

The stories we tell about tax day reflect a chronic disconnection from our role as citizens; they are devoid of civic meaning. Taxes pay for the things that underpin our public life and connect us to one another through our communities, our states and our country. When we lose sight of this, taxes are seen as merely depriving us of our individual property. If, on the other hand, we see ourselves as stewards of a common good, as citizen managers of public systems and structures that secure the city, state and country we live in, then taxes are our contribution to something important that is bigger than we are.

We all need to be telling a new and meaningful story about tax day that celebrates the concrete opportunity it offers “we the people.”

Part of the answer is to give people ways of understanding what government does. Research conducted for Demos by the FrameWorks Institute and Topos Partnership has highlighted how obscure the role of government is to most people, and making these functions visible and concrete is an important part of a new story about Tax Day. Another aspect of our relationship to taxes is personal—what do I get for my taxes. Some efforts to “rehabilitate” taxes highlight how we each benefit from tax-funded services and programs. There are testimonials from people who attribute their quality of life or their success to public systems and structures. The White House just released a tax-payer receipt calculator that calculates “how and where your tax dollars are spent.”

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Tax Evasion: The Real Costs

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Tax evasion will cost the U.S. government $305 billion in 2010 and has cost $3 trillion over the past decade. It is a major contributor to budget deficits and the accumulation of national debt since 2001. Tax evasion also costs state treasuries billions of dollars. Every tax filer will pay an extra $2,200 in 2010 to make up for the funds lost to tax cheating. Even modest success in reducing tax evasion would free up significant new resources for spending or deficit reduction. Yet last weekÕs budget deal nixed a proposal by the Obama Administration to strengthen the IRS’s enforcement capacity.

A Massive “Tax Gap”

Tax cheating gets fleeting coverage this time of year, but at the U.S. Treasury it is a source of constant angst. Why? Because the amount of money lost to tax evasion is large. Really large.

The last time the IRS crunched the numbers to estimate the “tax gap” was in 2005. Using data from 2001, it estimated that the “noncompliance rate is 15 percent to 16.6 percent of the true tax liability” that individuals, employers, estates, and corporations owe to the federal government. The IRS estimated final losses to the U.S. Treasury for 2001 at $290 billion (a figure which accounts for cheats who eventually paid the government back).

The IRS hasn’t updated its estimate of the tax gap in recent years, but using its same methodology it is possible to extrapolate the cost of tax evasion since 2001. Assuming that the level of tax evasion has remained constant—a conservative guess since over the past decade IRS enforcement hasn’t kept pace with sophisticated cheaters, particularly those stashing cash offshore—we estimate that the annual costs to the U.S. Treasury from tax evasion since 2001 have ranged between $257 and $376 billion a year. Cumulative losses during this period are estimated at just over $3 trillion.

The Wealthy Cheat More

Not everyone has an equal opportunity to cheat on his or her taxes. Employees who have income withheld have fewer options for tax evasion than people who are self-employed or have complex business or financial dealings. Likewise, large corporations with foreign subsidiaries and sophisticated accounting departments have more opportunities to cheat. In all, it is wealthier Americans who are most likely to cheat on their taxes.

In estimating the tax gap, the IRS found that the largest share of tax evasion—over 50 percent—was by individuals with business income. A more detailed breakdown of losses in 2008 by the scholar John Slemrod and IRS analyst Andrew Johns found that the single biggest source of lost revenue was from proprietors of businesses who don’t report the full amount of their income. Other big cheaters include professionals whose income comes through S corporations, partnerships, and real estate.

The study by Slemrod and Johns found that misreporting “generally increases with income, although it peaks among taxpayers with adjusted gross income between $500,000 to $1,000,000, and is lower than the peak ratio for individuals with income above $1,000,000.”

Tax Evasion, Deficits, and the Debt

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Taxes Matter Top 10 Stats

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1. The government collected less in taxes in 2010 than it has in over three generations, and tax rates are at historic lows.

2. The Bush tax cuts added $1.7 trillion to the nation’s debt over 2001-2008, which is more than it would cost to send 24 million kids to four-year public universities.

3. Corporate income taxes totaled about 1 percent of GDP this year, 60% lower than 40 years ago.

4. General Electric, which reported $5 billion in US profits, paid ZERO taxes this year. Exxon Mobil, the most profitable corporation in history, paid ZERO federal taxes in 2009.

5. The Bush tax legacy means we currently tax wealth less than work: middle-income paychecks are taxed at 25% compared to stock dividends and capital gains for the wealthiest, which are taxed at a top rate of only 15%.

6. While most small businesses dream of making a killing, only 3 out of every 100 small business owners pay taxes at the highest rate.

7. A Wall Street transactions tax of only 0.50% on short-term speculation could raise up to $170 billion annually.

8. A middle class family with two young children receives on average $1,200 through the federal child care tax credit, yet the cost of their child care averages $18,000.

9. Upper income households save an average of $5,500 thanks to the mortgage interest tax deduction.

10. Only four OECD nations collect less revenue as a percentage of GDP than the United States: Chile, Korea, Mexico, and Turkey.

— By Tamara Draut, Vice President of Policy & Programs at Demos

Taxes on the Wealthy: New Top Brackets Needed for the Have Mores 

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Any solution to the nation’s fiscal challenges will require tax increases, and tax increases on high earners in particular. But as the debate over the wealthy and taxes revs up yet again, fueled by President Obama’s renewed call to repeal the Bush tax cuts, it is time for some fresh thinking about how much the rich—and especially the super rich—should be paying.

Under current law, the top income tax rate applies to all earners making above $373,650—treating the merely affluent no different than the super rich. This doesn’t make sense. A couple making $400,000 a year in a major metro area is certainly very well-off, but they are not rich in the way of a CEO who pulls down $10 million a year. The tax code should reflect this reality by including new brackets for the richest of the rich.

The need to make distinctions between the Haves and the Have Mores has grown as those at the tippy-top of the income ladder have pulled far away from even the upper rungs. Between 1979 and 2008, according to data compiled by the scholars Thomas Piketty and Emmanuel Saez, the upper rungs (households in the top 10 percent) saw their average incomes nearly double from $135,429 to $233,711 (in 2008 dollars)—nice gains, and far greater than middle class households.

But folks in the top 10 percent may feel downright poor when they look upward, given that the top 1 percent really raked it in, seeing their incomes nearly triple during those decades, going from an average of $336,311 to $905,570.

And the inequality within the top 1 percent is even bigger. Between 1979 and 2008, average income in the top 0.1 percent of households quadrupled, soaring to $3.98 million a year. That’s a lot of money, to be sure. But maybe not when compared to the real winners of the new Gilded Age: households in the top .01 percent saw their average incomes grow from $2.57 million to $17.1 million—a whopping sevenfold increase.

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Loophole Land: Time to Reform Corporate Taxes

Graphic by Maxwell Holyoke-Hirsch, click to enlarge. This images may be republished free of charge with attribution to Demos. Contact mhirsch@demos.org for high-resolution file.By David Callahan

Many Americans were appalled when it was revealed recently that General Electric would pay no taxes for 2010, despite U.S. profits of over $5 billion.

But I doubt that there is a single top tax attorney or chief financial officer in the country who was all that surprised. You see, these people are denizens of Loophole Land – a very different place than W-2ville where most Americans live.

In Loophole Land, nothing is quite as it seems. Yes, there is a top corporate tax rate of 35 percent, but it is well understood that nobody actually pays that. On the contrary, many companies pay nothing at all.

How can this be?

For starters, Loophole Land has no national borders and so it is easy to shift money around in ways that avoid taxes. General Electric works all over the world, and under tax law, it isn’t taxed on its foreign profits as long as it says that it is reinvesting those profits abroad. Many companies become expert at shifting profits abroad to foreign subsidiaries in low-tax or no-tax nations. In 2008, Goldman Sachs, had 29 subsidiaries located in offshore tax havens and reported profits of over $2 billion. It paid federal taxes of just $14 million on those profits.

Loophole Land is also a place where past business losses are never, ever forgotten. So, for instance, if you run a giant conglomerate with a profit-hungry credit division that makes a lot of stupid loans to people who can’t pay them back, fear not: you’ll be able to write off those losses – in effect getting ordinary taxpayers to subsidize your gambling debts. General Electric is widely seen as a manufacturing company. But up to half of its profits during the Bush years came from its large consumer lending business, GE Capital, and that business suffered huge losses during the crash – reportedly $32 billion. Now we are all helping GE foot the bill for that unlucky streak.

Another thing about Loophole Land is that it is replete with generous tax breaks and subsidies. That’s because over time, different industries have convinced the rulers of Loophole Land that they are so important that they need a break. The National Commission on Fiscal Responsibility and Reform identified 75 different tax breaks and 30 different tax credits offered to business, calling this system “a patchwork of overly complex and inefficient provisions that creates perverse incentives for investment.”

One final point about Loophole Land: It is place where corporations find it easy to keep creating new loopholes and have enough clout to defend existing ones. General Electric spends millions every year to lobby Congress on arcane provisions of the tax code and is famous for hiring former IRS officials and former congressional staffers to help with this work. Meanwhile, at the local level, corporations have been masters at playing states and cities against each other to secure huge tax breaks, threatening to go elsewhere if they don’t get the perks they demand.

As I said, things are different in Loophole Land than W-2ville. And when you pile up all these accounting tricks and tax breaks, it is no surprise that many companies barely pay corporate income taxes. Indeed, the General Accounting Office reported in 2008 that two out of every three United States corporations paid no federal income taxes from 1998 through 2005.

Loophole Land has been good to its fortunate inhabitants, but not everyone wants the fat times to continue. President Obama’s deficit commission argued that all corporate tax loopholes be closed, and the President has said pretty much the same thing. The flap over GE’s 2010 tax bill has enraged many residents of W-2ville, even though GE finally pledged that it would pay some taxes for that year after all.

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