America’s underground and untaxed prosperity

Press, 12 April 1982, Page 12

America’s underground and untaxed prosperity

From “The Economist,” London

More Americans than ever before are choosing to keep their income secret from the Government. During 1981, according to a recent survey by the Internal Revenue Service (1.R.5.), taxable income of $B7 billion went unreported. Americans assess themselves for tax. Almost half the capital gains received from the sale of securities and real property remained in the pockets of cheaters willing to run the risk of a government audit. The arm of the law is not long. Only 1.9 M tax returns, or 1.84 per cent of the total, were .subjected to a full audit by the dwindling staff of I.R.S. agents in 1981. No more than 1785 prosecutions were brought.

Almost one taxpayer in three admits he does not tell the whole truth in his tax returns. He can anyway benefit from big loopholes. The I.R.S. code does not require financial institutions to report interest paid on government securities or corporate obligations issued in bearer form. The I.R.S. cannot match records of income paid with individual returns if social security numbers are missing. In 1979 one out of eight tax forms lacked a social security, number.

Investment tax credits are a fruitful ground for tax dodges. A controversial provision in the Economic Recovery Tax Act of 1981 allows profitable corporations to purchase the investment tax credits of firms in the red. General Electric’s use of this provision will provide a S9OM-SIOOM refund this year. One of the eight big accounting firms, Ernst and Whinney, has been sued by the Justice Department for deceptive use of investment tax credits to reduce taxes for clients: one deduction was taken for a toilet stall and door.

Inflation and creeping tax brackets have provided strong incentives for cheating Euro-pean-style by working in the “underground economy.” An individual earning $20,000 in 1972 needed to make $45,000 in 1980 to stay even. Some economists argue that the underground economy could amount to over 10 per cent of gross national product, or $3OO billion-$4OO

billion. The cash proceeds of small retail, construction and service businesses are certainly hidden savings. And if moonlighting were included in the national income, the unemployment figures might be lower too. Tax evasion in the erea of $lOO-billion federal budget deficits has prompted the drafting of a tough taxpayer compliance improvement bill sponsored by two Mid-western Republican senators, Mr Robert Dole of Kansas and Mr Charles Grassley of lowa. The bill would reouire securities firms, banks and insurance companies to report all purchases and sales of securities. Interest on federal debt obligations and bearer bonds of corporations would become part of the official reporting system. All

cash tips reimoursea on payments made by credit cards would have to be reported to the I.R.S. Withholding tax on private-pension annuities would be automatic unless the pension holder specifically rejected it. The I.R.S. estimates that these proposals would collect an additional $3 billion in 1983, $B.l billion in 1984 and $9.3 billion .in 1985. This is hardly enough to balance the budget. The securities industry is expected to argue in Congressional hearings that the cost of compliance is too stiff. Yet they brag about sophisticated computer capability that gives investors instant records of profits, income and yield on portfolios — just what the taxmen, too. want to know about.