Tax Evasion: The Real Costs

A publication from Demos’ Taxes Matter Week

Tax evasion will cost the U.S. government $305 billion in 2010 and has cost $3 trillion over the past decade. It is a major contributor to budget deficits and the accumulation of national debt since 2001. Tax evasion also costs state treasuries billions of dollars. Every tax filer will pay an extra $2,200 in 2010 to make up for the funds lost to tax cheating. Even modest success in reducing tax evasion would free up significant new resources for spending or deficit reduction. Yet last week’s budget deal nixed a proposal by the Obama Administration to strengthen the IRS’s enforcement capacity.

A Massive “Tax Gap”

Tax cheating gets fleeting coverage this time of year, but at the U.S. Treasury it is a source of constant angst. Why? Because the amount of money lost to tax evasion is large. Really large.

The last time the IRS crunched the numbers to estimate the “tax gap” was in 2005. Using data from 2001, it estimated that the “noncompliance rate is 15 percent to 16.6 percent of the true tax liability” that individuals, employers, estates, and corporations owe to the federal government. The IRS estimated final losses to the U.S. Treasury for 2001 at $290 billion (a figure which accounts for cheats who eventually paid the government back).

The IRS hasn’t updated its estimate of the tax gap in recent years, but using its same methodology it is possible to extrapolate the cost of tax evasion since 2001. Assuming that the level of tax evasion has remained constant—a conservative guess since over the past decade IRS enforcement hasn’t kept pace with sophisticated cheaters, particularly those stashing cash offshore—we estimate that the annual costs to the U.S. Treasury from tax evasion since 2001 have ranged between $257 and $376 billion a year. Cumulative losses during this period are estimated at just over $3 trillion.

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