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New IRS Report Demonstrates Yet Another Reason Income Inequality Persists

If we reported that the rich continue to find ways to avoid paying taxes, the statement would elicit no more than a passing yawn, as by now this fact is common knowledge. But a new report released earlier this week by the IRS reveals why the nation shouldn’t continue to accept wealthy tax dodging as inevitable.

The IRS report confirms that the best-off taxpayers (those with incomes of $200,000 or more) continue to find legal ways to make their federal tax obligation $0. Worse, the report finds that this is occurring at a pace not seen for decades.

From the report’s first publication in 1977 through 2000, the number of high-income Americans paying no tax never exceeded 3,000. But the past four years have seen an explosion of high-end tax avoidance: in each of these years, the number of zero-tax Americans found in this report has exceeded 30,000.

In 2011 (the latest year for which data are available), almost 33,000 people with incomes over $200,000 paid no federal income tax. For this group—less than one percent of all Americans with incomes over $200,000 in 2011—tax-exempt bond interest and itemized deductions are among the main tax breaks that make this tax-avoiding feat possible. 

In 1977, Congress mandated the IRS publish this report annually to help policymakers understand whether high-income tax avoidance was an ongoing problem, and (presumably) to help build the case for reform. This latest report paints a clear picture of a growing problem.

The good news is that tax reforms included in President Barack Obama’s budget plan for the upcoming fiscal year would pare back tax breaks for itemized deductions and bond interest, making important strides toward restoring these high-income Americans to the tax rolls.

Whether it’s gigantic Fortune 500 corporations or super-rich individuals, tax avoidance has a corrosive effect on the public’s confidence in our tax system, not to mention it perpetuates worsening income inequality. Ensuring the best-off Americans have some “skin in the game” should be a basic priority of tax reform.