How are Americans avoiding paying $688B in tax?

Sascha: [00:00:02] Welcome to the diverse podcast that asks Who said business news needs to be your business? I'm your host, Sascha Kelley. $688 billion. That is how much tax Americans avoided paying in 2021. With Australia's tax deadline fast approaching, it's tomorrow or the 31st of October 2023. So get your tax returns in. We wanted to understand how Americans could avoid paying so much tax. It's Monday, the 30th of October. And today I want to know how do Americans avoid paying more than half a trillion dollars in tax? To talk about this today, I'm joined by the co-founder and my colleague here, equity mates. It's Alec Renehan. Alec, welcome to the dive. 

Alec: [00:00:45] Sascha, good to be here.

Sascha: [00:00:46] Well, we'll start as we usually do, which is that numbers are kind of hard to understand unless you put them in a little bit of context. Give me some idea of how big $688 billion is, because all I can think is it's a lot of zeros. 

Alec: [00:01:00] Yes. So the US government spent $6.13 trillion in fiscal 2023, so 688 billion. If that was collected in tax rather than avoided, it would add about 10% more to the US federal government budget. It's still a little bit out there, I guess. So I had a look at some of the big buckets of spending in the US government budget to put $688 billion in perspective. Every year the US government spends 821 billion on national defence or transportation. It spends about $127 billion. So it's about five times the US transportation budget. It's a bit smaller than the US National defence budget. So $688 billion is a lot of money. 

Sascha: [00:01:53] Yeah, it's a huge amount. And is this kind of coming out of nowhere or is this an outlier or is this number being growing every year? 

Alec: [00:01:59] It's growing every year. It grows alongside economic growth. You know, if there's more money being made, there's more taxes to be avoided, but it's rocketed up the last few years. So according to the Internal Revenue Service, which is the tax agency over in the US between 2017 and 2019, the unpaid tax bill was about $550 billion a year on average through 2020. That rocketed up to 601 billion. 2021 it's rocketed up again to $688 billion, etc. On that track record, the trillion dollar mark is in their sights. 

Sascha: [00:02:41] I know it just keeps going and going. So if you know, I was going to say million dollar question, but really it's like billions of dollars. Question is how on earth did they avoid paying so much tax? 

Alec: [00:02:53] Yes. So the number, the 688 billion is primarily due to underreported income. The IRS estimate, $542 billion of it is underreported income, mainly from companies and farms. So that's their estimate. And then 146 billion, the remainder really is by those that didn't file returns when they should have or didn't pay their tax bills when they were sent. So it's not that people aren't filing their taxes, it's that they're filing them and underreporting. 

Sascha: [00:03:27] But if they know it's underreported, why can't they just make people pay it? I don't get that.

Alec: [00:03:33] Yeah, Yeah, it's a good question. So after enforcement and light penalties, the IRS estimate they'll get back about 63 billion of the 688 billion. So there's still a large chunk remaining unpaid. Obviously, it is somewhat of an estimate. I guess it's extrapolating the audits that they can simply not enough humans and computing power in the IRS to go through everyone's tax. And so they audit what they can and then they extrapolate from there. And it is an inexact science. The Biden administration's Treasury Department had previously estimated around $600 billion a year was the avoidance number, so a bit lower than the IRS estimate. But here's an interesting start from the Treasury Department's estimate. They blamed more than a quarter of the missing tax dollars. So more than $150 billion of the tax, missing taxes on the top 1% of households. So the top 1% is responsible for 25% of the tax avoidance, according to the Biden estimates. And here's another interesting little tidbit as we had a look at this massive unpaid tax bill, former IRS Commissioner Charles Rettig once said the gap could be up to $1,000,000,000,000 each year. And that gap he puts to cryptocurrency and the other. Reported crypto gains that people should be reporting, but they're not. 

Sascha: [00:05:03] You're right, Alec, Two pretty interesting facts right there. Let's take a quick break and then when we get back, you've told me that there's some exciting news coming out of the American tax law. Look, I'll believe it when I hear it. I got bills. Welcome back to the dive. I'm joined today by my colleague and the co-founder of Equity Mates. It's Alec. We are talking all things tax in celebration of the Australian tax deadline that is fast approaching. Best of luck with your individual returns. I've already put mine in Alec, so I'm feeling pretty smug. Tell me you've teased that there's some exciting news coming out of America in that tax system. I'm pretty sceptical, but I'm ready to hear what it might be.

Alec: [00:05:56] Yes. So if you've ever heard that money in politics can have an influence, there is no clearer example of that than in American tax law. And it is one of if you ever want to get frustrated about democracy. I know, I know we're not in America, but I think many of the principles probably extend to large parts of the world. The American tax filing system is one. So there are these massive tax prep companies, H&R Block, Intuit. There's a number of others, TurboTax. TurboTax is owned by Intuit, and they spend big money lobbying the US government to not allow it. It's called e-filing. It's called pre-filled filing. But essentially think about how we file taxes in Australia. The Australian Tax Office gets a lot of data from our employers for our brokerage accounts, from different sources, and now we can log on to the ATO website and most of our tax information is pre-filled. 

Sascha: [00:06:58] Makes it so much easier. 

Alec: [00:07:00] These large tax preparation companies over in the US have been lobbying for decades to avoid that happening. Now, ProPublica, the investigative journalist outfit over in the US, has done some really great reporting on this. They have reported that Intuit and H&R Block together have spent $35 million lobbying federal politicians since 2006 and even more. We were laughing on a previous episode of The Dive about some of the names that we save for different organisations. How's this one? The American Coalition for Taxpayer Rights was a trade association founded in 2011 by several of those tax prep companies, including Intuit and H&R Block, to lobby against these changes. So on top of the 35 million that Intuit and H&R Block spent themselves since 2006, the American Coalition for Taxpayer Rights has spent more than $1,000,000 in 2020 and in 2021 also lobbying to stop this tax change going through. 

Sascha: [00:08:08] But Alec, that sounds like an oxymoron, like taxpayer, right? It's so much easier with e-filing. It feels like they're kind of arguing against themselves. 

Alec: [00:08:17] Yes. So the reason that they argue that it's for taxpayer rights is because it protects taxpayers from governments intruding on their privacy. Now, don't don't interrogate that thought too much because American taxpayers have to submit their information to the government anyway. It's just without a pre filing system, it's through H&R Block or Intuit software. But privacy. 

Sascha: [00:08:41] Sascha, I'm going to put that up to a cultural difference between laziness and privacy that I personally fit more on the Australian side of. But you've also told me that e-filing is now slowly coming to the U.S.. 

Alec: [00:08:53] Yeah, that's right. So as part of President Biden's Inflation Reduction Act, $15 million was allocated for the IRS to look at creating a direct filing program earlier this year. So this news story broke a little while ago. But, you know, tax deadline day, this is the time to talk about it. Yeah, The IRS have announced that they've built a prototype. Some Americans will be able to use it in this fiscal year. And if it works, they'll roll out to more excitingly, it'll be digital. It'll also be free of charge. And that's the reason that Intuit and H&R Block and the rest of the tax prep companies have been lobbying against this for so long. But I said it was exciting. Sascha, It has come to America. Free tax filing. The US Government Accountability Office had previously done a survey. They reported that 72% of taxpayers surveyed were interested in using a free government provided tax preparation tool. Not surprising. Why wouldn't you be interested? And you know, in this report, they also said that the vast majority of other wealthy countries, Australia was named, but also Spain, Sweden, most wealthy countries offer some pre-filled tax return system. So America is finally catching up. But it's just a good story that once in one instance, the world has overcome the power of lobbying dollars and has made a change that the vast. Majority of people wanted to say. 

Sascha: [00:10:29] Yeah, absolutely. I was. As you were setting the scene, then, I thought, this is ripe for disruption, you know, paperwork and bureaucracy. It just seems like it's adding a whole load of processes to something that the rest of the world's caught up with.

Alec: [00:10:43] And to give you a sense, IBISWorld, the company that does like big industry reports, they reported that the tax preparation market in the US was worth $14.4 billion a year. So that's why they lobbied so much. That's what they were trying to protect. 

Sascha: [00:10:58] Yeah, absolutely. Well, look, Alec, we've talked for over 10 minutes in tax, which I feel is an achievement for a monday, so we might leave it there for today. Thanks so much for joining me on the dive. 

Alec: [00:11:10] Thanks, Sascha, go to your tax return. Oh, you've already done it. I better go do mine. 

Sascha: [00:11:14] Yeah, you go do your tax return. Until next time, we'll talk to you on Wednesday.