Trump's tax reforms - designed to enrich Apple by at least $47 billion - will see large corporate America have its tax rate cut form 35% to 20%; ordinary Americans see their personal income tax increase from 10% to 12% and those living in Democrat states always see their taxes rise (because that's implicit in the design). Trump says this will be a 'big, beautiful tax cut'. But the real question is, will it work?
That is a reasonable question to ask. That's because this whole plan is premised on the idea that if rates are reduced then business will invest more, jobs will be created, and growth will follow. There is, however, implicit in that assumption another, even more implicit, assumption, which is that Americans pay the tax that they owe already. And the fact is that they don't. The US General Accounting Office (GAO) has just issued a new report on the performance of the US Internal Revenue Service (IRS) in addressing their tax gap. It's pretty damning stuff. Admittedly the data is somewhat out of date, because they have nothing available beyond 2008, but for that year the tax gap looked like this:
As they note, in the US just 81.7% of the taxes that are owed are actually paid. Admittedly not every tax is considered, but all the important ones are. The research covers individual income, corporation income, employment, estate, and excise taxes.
The amounts lost are staggering:
Clearly the losses have increased by now.
The losses are not consistent across all taxes:
The compliance rate with regard to employment taxes is, very obviously, higher than in the case of other taxes simply because the tax is deducted at source before an employee is ever given the option to evade it. But what is very clear is that if an American is given the option to evade then a lot take it. As this data shows that is not in total in most cases:
Choosing to pay some of the taxes that are owed is, broadly speaking, ten times more common than evading tax altogether. Which taxes are evaded does, however, depend very heavily upon the chance of being found out:
As is apparent, wages are very largely reported, as is most income where reporting from a bank is commonplace. It is income from trade that is most commonly underreported. And that happens most often when there is no third party involved. The report does in fact suggest that 76% of all self-employed income in the USA was misreported, although in fairness it should be pointed out that 13% of the errors were over, and not under, reporting. The average under declaration of income was just in excess of $4000.
What does this mean? First, this data, which is undertaken on a much larger sample based on that used by the UK's HMRC, reports a much larger tax gap than that which is suggested to arise in the UK.
Second, as I have long suggested, the biggest issue in the tax gap is not tax avoidance by large multinational companies, however significant this is with regard to behaviour and agenda setting. Instead, tax evasion by small businesses is by far the biggest issue of concern.
Third, what is apparent is that the business owners, who are meant to be incentivised by Trump's tax plan, will actually be indifferent to it: those who do not like the existing tax regime are already taking whatever tax cuts they like, as they choose, and as often as they wish.
Fourth, this then implies that Trump's tax plan has almost no chance of delivering the economic growth that he suggests might arise from it because the cut that is planned has already been taken.
Fifth, and in conclusion, what is clear is that if tax is to play a fundamental part in macroeconomic policy agenda setting then there has to be a rigorous, and enforced, tax regime where most taxes are paid and business operates on a level playing field. In the US that level playing field exists, but solely because tax non-compliance is almost endemic right across the business spectrum. However, what that means is that tax incentives aimed at the business community to induce investment are bound to fail. And that, we can be sure, is exactly what will happen with Trump's tax plan.