The top 1% of high-income households in the US fail to report 20% of their income, a new paper reveals

  • The top 1% of US earners aren’t reporting about a fifth of their income, new research shows.
  • Under-reporting is even higher among the top 0.1%, the paper found. 
  • Offshore accounts and pass-through businesses are used to avoid taxes.
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The top 1% of the highest-earning American households fail to report around 21% of their income, according to new research by the Internal Revenue Service (IRS) and academic economists.

This is a far larger percentage than the IRS’s methods had previously assumed, according the working paper published Sunday and first reported on by the Wall Street Journal. ]

Out of the 21% of unreported tax, around 6 percentage points are linked to sophisticated tax evasion that is rarely detected in random audits, the paper, by researchers at the IRS as well as schools including the London School of Economics, Carnegie Mellon, and the University of California at Berkeley, said.

These high-income households avoid paying tax through a number of ways, researchers found, adding to a bevvy of recent insight into wealth secrecy and tax avoidance. One strategy is using tax havens, where super rich individuals keep money in offshore accounts. Such evasion “increases the top 1% income share” in the US, the paper said. 

Read more: Billionaire Tom Golisano says the Warren wealth tax would be ‘triple taxation’

Under-reported income is almost twice as high among the top 0.1% of earners, largely because of tax evasion through foreign bank accounts and pass-through businesses, like partnerships and S-corporations, the report says. The research found offshore accounts made up about $15 billion of evaded taxes, with the top 0.1% accounting for most of that. 

To be in the top 1% of earners in the US, a family must meet an annual income threshold of $421,926, according to 2018 data from the Economic Policy Institute. But the average annual earnings for these top earners is actually $1,316,985.

For a decade, audit rates and staffing at the IRS have declined because of budget cuts, but Democrats and President Joe Biden are seeking to change that by expanding the agency, the Journal said, noting that additional enforcement could increase tax revenue by $1 trillion over a decade. 

Last week, Biden said he was considering a tax hike for the wealthiest Americans in order to fund an infrastructure and jobs package. Those making more than $400,000 could see taxes raised to nearly 40% under the plan.Earlier in March, Democrats including Sen. Elizabeth Warren proposed an ultramillionaire tax on the top .05% of earners, which would raise $1.4 trillion over a decade, based on Forbes billionaire data.

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