Yeah, I know.  You and the media are all incensed that TheDonald deducted $ 70K for his hair sculpturing.  I know that comes to about 14,000 cans of Self-Styling Adorn- which is a bit excessive.  Except…

TheDonald, at the time, was on TV.  And, he ALWAYS has been obsessed about and by his image. So, while it’s excessive to you and me- it probably is an (almost) legitimate business expense.

But, to be honest, TheDonald and his tax escapades are not really the primary focus of this post.  No, I want to talk about the IRS and the rich.

First of all, let’s be clear.  The IRS doesn’t write the laws.  That’s supposed to be Congress.  (Here’s a dirty little secret.  A bunch of our laws are written by lobbyists- who hand the document over to the Senators and/or Congressman who’ve accepted their bribes [oops, sorry- campaign donations] in return for the presentation of the proposed law.)

And, the IRS is not fully funded.  Not since the GOP felt that their friends who were creating fake charities to donate money to political candidates were having a hard time getting their non-profit status designation.  (By the way, although [at the time] fewer Democratic party operatives were creating these charlatan charities, they were having the same degree of difficulty getting approval.) I personally consider this an example of the IRS doing their job RIGHT!

So, what does it mean when I say the IRS is underfunded.  The IRS enforcement budget is down 25% over the last decade- even as the number of tax filings has increased.  As a share of tax collections, the IRS budget has been cut about ½ from it’s peak in 1993 (in constant dollars)!

This is why the government estimates the IRS will fail to collect $ 7.5 trillion in taxes over the next decade.  (Let that sink in for a moment!)  Now, not all taxpayers escape at the same rate- but if they did, the top 1% would be skimming $ 75 billion from the US treasury.  But, in real terms, recognize that the 1% tax gap much closer to $ 2 trillion over the next decade.

And, if the IRS wants to examine the tax records of, say, Bill Koch or even Donald Trump, they can assign at best one or two folks working on the case.  While Bill or Donald will have a 50 person platoon of lawyers and tax advisors ready to battle to the end.

You also have to recognize that the tax code has been written to accommodate the rich.  The wealthy have the ability to institute complex trusts, life insurance schemes, private pensions- all to minimize their tax liabilities.  Silicon Valley startups- with copious quantities of venture capital dollars- avail themselves of small business breaks.  (This is the problem when the government decides that a firm of 500 employees or less, even if funded to the tune of  $ 500 million or more is a small business.)  Many multinational firms move their proprietary rights to foreign countries (with virtually zero tax rates) and charge the US entity outrageous licensing fees to minimize their US profits, thereby avoiding taxes.

All the while the bulk of Americans are primarily paid by wages- W2 income.  Their taxes are automatically withheld and they have no means at their disposal to shelter even a penny of their income.  So, they are virtually 100% tax compliant- not necessarily because they may want to be, but because there is no way they can’t be.

As one’s wealth increases, stocks can be bought and sold.  These capital gains have special (lower) tax rates.  These richer folks can also buy houses to rent to others- and that provides a panoply of tax deductions.  Or, they become solopreneurs- which lets them figure out ways to deduct $ 70,000 on their hair maintenance. 🙂  The problem is that many of these proprietorships are guilty of underreporting (or not reporting) income- and said income is, therefore, untaxed.

One would think the IRS would go after the richer folks- or the Silicon Valley “small businesses”.  These are the sources of most of the unpaid taxes.  But, no- instead the IRS goes after low-income households to make sure their EIC (earned income credit) is properly earned.

Consider this:  The highest tax audit rate (by county) in the USA is that of Humphreys. This county in ru­ral Mississippi has 1/3 of its residents living BELOW the poverty line and where 3/4 of them are Black. The median annual income? $ 28, 500.

What does the IRS expect to fix?  Ensuing that no one cheats and gets the earned income credit that doesn’t deserve it!  Why?  Because the lowest earners are petrified when the IRS comes- and almost always roll over (even if the IRS is wrong) and agree to the IRS findings- while, as mentioned above, the 1%-ers marshal their droves of experts to fight the IRS for every single penny.  So, the IRS can collect quicker from the bottom of the barrel (albeit for scraps) than they can at the top (albeit for millions).  That’s why they haven’t gone after TheDonald for illegally paying his daughter a consulting fee of $ 700,000 (that he made his partners shell out)- even though she is an employee of his company- which makes the transaction VERY suspect.

It’s time that we invest in the  IRS to augment their tax compliance and investigative efforts,  so that everyone pays their fair share of taxes.

(If you visit the IRS, you will find this motto on the wall- “Taxes are what we pay for a civilized society”.  That’s a quote from Oliver Wendell Holmes!  More honored in word than in deed.)