Two Questions

IRS Bounty Hunters

I saw this article in a leading Swiss Newspaper. Understandably, this story has the bankers in Zurich on edge, again. The banner (Google translation):

Back in 2007 the IRS refined its program to pay for information leading to a conviction for a tax fraud. The new rules allow for a payment of as high as 30% of the taxes collect. The story in this paper is about one case announced recently where an individual was paid $4.5mm after the IRS collected $20mm from the tax cheater. Of interest to me is that the guy doing the ratting was also the tax accountant for the cheat.

I pay a bunch in taxes and I hate it. It pisses me off when I (we) end up paying more because there are folks cheating the system. I’m not at all sure how much anyone should be paying in taxes. My answer is that it’s not zero. If you put those two thoughts together the notion that the IRS is now paying big bucks for “tips” is probably not such a bad thing.


That said, I’m troubled by this. The IRS has turned the civilian population into its enforcement division. Yes, some good may come from this, but some bad will too. This has a whiff of vigilante-ism to it.

The IRS bounty rules only apply for settlements in excess of $2mm. So your average, cabdriver, part-time tutor, waiter/bartender etc. need not worry. I don’t think that will stop people from ratting out some small fry (friends and neighbors included) who are dipping a bit with the IRS. It certainly will create a cottage industry of PI’s, accountants, lawyers who are going to start snooping. A $4 million payday brings lots of slugs into the open.

I’m interested to read your thoughts. Like I suggested above; I go both ways on this one.

On that Tax Hike for the rich folks

I was looking at some IRS numbers on who pays taxes to the federal government. This data is from 2008. That was a bad year to look at incomes/taxes. There was a big drop in income due to the recession and market crash. But it’s still useful to look at.

If we’re going to raise any significant amount of new revenue it will have to come from the top 5% of earners. Note that in 2008 the top 5% was anyone who made over $159k. That number has crept up in the last few years. For 2012 the top 5% will be any household income that is in excess of ~$170k. Depending on where you live and how big your family is that is really not so much these days. But it is greater than the rest of the 95%, so that is where the new taxes will have to fall.

Note in 2008 the top 5% (a) earned 35% of all income, (b) paid $600 billion in taxes, (c) paid 59% of all taxes, and (d) the average tax rate was 21%.

I think the AGI revenue numbers are currently running at  ~$9.2T (up 10% since 2008). Assume that the effective tax rate is about the same. Now let’s raise the taxes on this group of rich people. How much more should they pay? How does a 50% increase strike you? Changes in the tax code to limit deduction AND increase the top bracket that resulted in an increase from 20% to 30% it would raise an additional $325billion. With a 1.6 trillion deficit that extra money would come in handy, but it only covers 20% of that shortfall.

If the tax rate(s) were to be adjusted so that the poor bastards who are making over $170k get their taxes doubled from 2008 levels it would still only raise $625b, leaving us with a hole of $1 trillion.

The effective tax rate would have to be raised on the entire top 5% to 75% in order to balance the budget. Put another way; if you were lucky enough to earn $200k, your take home would only be $50k. And that number does not include state taxes, property taxes or sales taxes. Basically, you have nothing left.

If you think that the solution is to raise taxes BIG TIME on the uber-rich, think again. The top 1% should have about $1.85T in income in 2012. IF we really sock it to them and nailed them at a 90% effective rate we could cover 1.3T of the 1.6 shortfall. This would imply that the top 1% would be paying 75% of all taxes collected.

I hope that this shows that raising taxes on wealthy Americans does not work very well. Yes, we could technically go the route of Sweden and tax income over $500k at 70% or so. But what might be the consequences?

Question: What should the federal rate on high-income earners be? What rate would you apply to those making ¼ mil a year or more? ½ mil? A cool mil?