- America’s spending as a percentage of GDP has not been a problem, historically; paying for it has.
- A well-written and properly enforced tax code would reduce the US federal deficit.
- Successful tax collection could fund any number of policy initiatives.
Table of Contents
Recommendation
Tax policy in America has long had its problems, and politicians have made the Internal Revenue Service a villain. Yet meager resources at the US Treasury have led to unprecedentedly low audit rates and lax enforcement, allowing both tax evaders and avoiders to profit at the expense of middle-class and low-income American households. In this bold essay, professor Scott Galloway argues that making the rich pay their fair share starts with an improved tax code and robust enforcement, and he suggests changes that could ease the burden on low-wage earners.
Summary
America’s spending as a percentage of GDP has not been a problem, historically; paying for it has.
Partisan squabbling has led both US political parties to spend with abandon: the Democrats on social initiatives and the Republicans on lower taxes. Both sides share in creating unsustainable, runaway sovereign debt.
“Certainly, we could spend less, but spending isn’t the problem. The problem is that we aren’t funding the spending we’ve agreed upon.”
The US economy is huge; its population’s needs justify rising government spending. Absent the Great Recession of 2007–2009 and the coronavirus pandemic rescue packages, America’s spending relative to GDP has experienced only a mild increase from the 1960s – from 17% to 20% annually. The cost of US government borrowing is low, but the national deficit now totals what the US economy produces in a year, and that’s bad. Political promises to reduce the debt burden ring hollow. Tax increases are not palatable to the electorate. People’s attention should be on tax collection rather than on tax rates.
A well-written and properly enforced tax code would reduce America’s federal deficit.
Federal spending on Social Security, defense, Medicare and Medicaid, social safety nets, federal employees and benefits, infrastructure, running the national government, and interest costs will total $6.2 trillion in 2023, based on Congressional Budget Office estimates. Revenue of $4.8 trillion leaves a $1.4 trillion shortfall. Stanching the revenue drains of tax evasion and avoidance could fund this deficit.
The practice of the understatement, underpayment or nonpayment of taxes owed – tax evasion – is illegal. A defunded and enfeebled Internal Revenue Service (IRS) can’t keep up with the vast number of nonpayers. Vilifying the agency gains votes, particularly those of the GOP. Audit rates have reached their nadir, which shifts the tax burden to lower and middle-income households. Tax grifters abscond with close to $1 trillion annually, according to IRS estimates. The wealthy earn the lion’s share of all income, one-third of which goes to the top 5% of households in America. More than one-third of taxes evaded are attributable to the top 1%.
“But we can make a major step toward closing the gap between our spending and our revenue. By actually collecting the taxes we’re owed. The distraction is tax rates; the focus should be the tax code and enforcement.”
Tax avoidance – following a strategy to pay the lowest legal amount of tax – is legal and justifiable. Large-scale and complicated strategies that rely on ambiguities in the tax code serve those with complex finances and the wealth to retain expertise to exploit those ambiguities. The flawed logic is that lower corporate tax rates translate into larger revenue streams, a portion of which will redound to the benefit of employees and clients. But big firms accomplish grand-scale avoidance by establishing their operations in low- to no-tax domains – offshoring – and by where they report their income – profit shifting. These corporations make lower tax payments and show higher profits, which pass income on to the wealthiest 10% of households that own roughly 90% of US equities. Consensus estimates say that approximately $200 billion in lost revenue annually results from corporate tax avoidance.
“Americans are a prosperous, generous people. Let’s start acting like it.”
Wealthy individuals reduce their tax burden by minimizing cash income and borrowing against assets, because loans are not taxable. The wealthy’s use of tax havens saves the top 1% of Americans $175 billion annually in what looks to be a questionable area between tax avoidance and evasion.
Successful tax collection could fund any number of policy initiatives.
Efficient tax collection could reduce deficit spending and help to restore trust in US institutions and government. It could eliminate the federal income tax burden on the lower 90% of American households, make the annual $15,000 child tax credit permanent, and eliminate Social Security and Medicare taxes on the bottom 50% of income-earning households.
About the Author
Scott Galloway, professor of marketing at New York University’s Stern School of Business, writes for and hosts the No Mercy/No Malice blog and podcast.