The rich cheat more on their taxes

Copyright: vivre

A new study The Distribution of Income Tax Noncompliance reveals what we've all been suspecting - the rich hide their income come tax season.

The previously unreported study estimates that taxpayers whose true income was between $500,000 and $1 million a year understated their adjusted gross incomes by 21% overall in 2001, compared to an 8% under reporting rate for those earning $50,000 to $100,000 and even lower rates for those earning less.

In all, because of their higher noncompliance rates, those with true incomes of $200,000 or more received 25% of all income, but accounted for 40% of net under reported income and 42% of under reported tax in 2001, the new analysis finds.

The study was written by Joel Slemrod, an economics professor and director of the Office of Tax Policy Research at the University of Michigan's business school and IRS economist Andrew Johns. It has not been officially endorsed or even released by the IRS and seems sure to add fuel to the election season debate over whether those earning $250,000 or more should pay higher tax rates, as Sen. Barack Obama, the Democratic presidential nominee, has proposed.
The Slemrod/Johns analysis uses unpublished data from special research audits the IRS conducted on a sample of 45,000 individual returns filed for 2001. It was the IRS' first such research effort since 1988, and it led the agency to estimate the 2001 gross "tax gap" at $345 billion.

The main reason for the income-related cheating disparity: Higher income folks receive more of their income from sources that are easier to hide, including self-employment earnings; income from rents, partnerships and S corporations; and capital gains. (Forbes)