From Kakistocracy to Cheatistocracy

Transcript

At this point, it’s almost a commonplace to say that under DonaldTrump, America has become a kakistocracy, ruled by the worst. But I don’tthink it’s fully appreciated the extent to which we’ve also become a cheatistocracy, ruled by the most corrupt.

Today’s commentary is a follow-upon yesterday’s primer, which was about the role of tax evasion both in leading to or contributing to our downward spiral into oligarchy and also as a surprisingly large factor in the budget deficit and therefore in America’s debt problem.

Before I get to tax evasion, let me say something about where I’ve been going in my kind of intellectual journey into understanding oligarchy. As an economist, normally my instinct is to think about the invisible hand, to think about market forces, about technology as driving what happens to society. And even now there’s at least some extent to which the rise of kind of garden variety inequality, the rise of the top quintile at the expense of the middle, may be partially explained by the bias of technology towards higher formal skills, although that may be ending now with AI and all of that.

But as I began to focus on oligarchy, on the very small number of people who have enormous wealth, enormous income, but the wealth is an even bigger factor — there are a really handful of people who have come to play such a large role.In our society, in our economy, and above all, of course, in our politics— I was forced more or less by the numbers to say this is not about the invisible hand. This is not about market forces. It isn’t even mostly about technology.

Yeah, some technologies create winner-take-all markets that make people int he right place extremely wealthy. But the really big factor that’s driven us from the relatively equal society that we were 50 years ago — not obviously anywhere close to truly equal, but nothing like the dominance of a tiny elite that we have now — the really important factor is policy and above all tax policy.

We basically stopped imposing progressive taxes that limited the growth of enormous fortunes. And sure enough, as the tax barriers to accumulation of excessive wealth went away, excessive wealth began to concentrate.

This is, in many ways, the fundamental story. We got rid of, we ended the Gilded Age with its dominance by, as FDR said, the power of organized money, largely by taxing a lot of that organized money away. And we got back to something which in many ways is worse than the Gilded Age by taking away those taxes and allowing vast fortunes to snowball and buy themselves enormous political power, which allows them to snowball even further.

One factor in all of that is the rise of simply not paying taxes that you’re supposed to pay. A lot of it is reductionist statutory tax rates. We tax corporate profits at a far lower rate than we did In the 1950s, we tax top incomes at a much, much lower rate than we did in the 1950s. But what’s also true is that we simply allow people to get away with not paying taxes to an enormous extent, to almost surely a much greater extent than used to be the case.

The numbers are big, and in the primer I go through the tax gap. The money owed but not in fact collected is certainly north of $600 billion a year. It is something like 40% or more of the U.S. federal budget deficit. It is a major contributing factor to the accumulation of vast fortunes.

What is striking is that far from really making an effort to rein in that tax gap, for the most part politically our system has moved to let it rip, has basically tried to make America safe for tax cheats.

This is something that overwhelmingly benefits people with high incomes and large wealth because people with really big incomes, people who are extremely wealthy, for one thing, they just have much more complicated income. It’s much, much harder to track down and audit someone who has multiple businesses, some of which are dummy businesses, some of which may be real, but nonetheless are conduits through which money can move. And only the very wealthy can maintain offshore accounts that enable them to hide income and so on.

So tax evasion is something that overwhelmingly benefits people with very high wealth and income. Not all! Not every billionaire is a tax cheat. There are levels and levels. There are some people who just feel that’s not something I want to do.People who feel that it would be wrong. Morality does exist. There are people who feel that their personal losses, should they be caught out cheating heavily on their taxes, would be large. So they care about their reputation.

And then there are those who don’t.

What’s astonishing is that we have, especially since 2010, especially since the hard right Republicans took control of the House of Representatives, we have moved to largely eviscerate any attempt to control that type of tax evasion.

The numbers are really startling, and the IRS has actually put out very useful information. If you are someone with a very high income, the IRS stops counting pretty much at a million or more a year, but presumably it’s even more true further up the scale.

In 2011, before the right-wing Congress was able to do its work, more than 7% of tax returns in that range were audited, which is not unreasonable because there’s obviously a lot of possibility for malfeasance there. It’s not saying that 7% of people with incomes of morethan a million were sent to jail. Obviously nothing like that, but we had widespread auditing, which among other things, encouraged people not to cheat on their taxes.

By 2019, just eight years later, that number had gone from 7.2% to 0.7%. So almost nobody with high incomes was being audited for possible tax fraud.

Now, why was that happening? There had been savage cuts in the funding to the IRS. Very large, at least 25 to 30% adjusting for inflation, something like a 40% reduction in the staff available for enforcement. And as it turns out, auditing the taxes of a very high income person is a lot more expensive than auditing a regular person. An ordinary blue collar worker, middle income, white collar worker who might be failing to declare some income, in many cases, it’s really very hard for them to evade taxes at all. And if they do, it tends to be relatively straightforward to pick apart what’s going on. And so audits of ordinary people are cheap.

Audits of millionaires and billionaires, sounding like Bernie Sanders, are very expensive. And so the IRS, with limited resources and wanting to show that it was in fact auditing people, largely gave up on auditing the extremely wealthy.

And this is a big number. The amount that we lose to tax evasion is something like the entire budget of Medicaid. It’s something like six times what we spend on food stamps. It’s something like 15 times the amount of money that Elon Musk saved by destroying USAID and killing millions of people in Africa. And yet it has been allowed to flourish.

Notice, by the way, that this is all pre-Trump.

Now, under Biden, there was a push to rectify the situation, a push to restore enforcement, increase the resources of the IRS, and increase enforcement actions in an attempt to tilt the agency’s priorities back towards where it should be, which is going after the big money. And that was just getting started. It takes a while to ramp those things up.

And you know what happened. Of course, Trump’s one big beautiful bill did savage cuts in IRS resources for enforcement.Savage cuts in personnel. We’re now back to a situation where things are worse than they were before Biden started to try to fix it. So this is going to continue.

What I find remarkable and interesting — I mean, I wouldn’t say that I’m baffled, but I think it is something that takes some analysis is why exactly.

I mean, it’s one thing to favor the interests of the uber wealthy. Okay, we know that’s what the modern Republican Party is, whatever it may claim to be.

But it’s another thing to systematically favor the least honest. What this policy does is It basically says if you are an honest billionaire — I’m afraid to name somebody because who knows what may come out in some future set of files — but if you are an honest billionaire, you are disadvantaged by the fact that dishonest billionaires are able to get away with cheating on their taxes. You should be opposed to that, but obviously the party that currently controls Congress, the White House, and the Supreme Court, that party actually prefers dishonest men of great wealth. It’s actually a positive preference for cheaters.

I can speculate very loosely. It’s often been observed of Trump, and it’s probably true of some others in his camp, that at a fundamental level, he does not believe that anyone has good motives. And that someone who appears to actually be a decent person who plays by the rules is, by that very token, someone Trump distrusts.

He kind of assumes that they must be even worse than he is. Otherwise, they wouldn’t be faking having good intentions, which people like him never have. Maybe there is something going on, something deeper. But in any case, wehave developed a system where not only do we enormously favor the interests of people who already have vast amounts of money, but we literally favor malefactors of great wealth, to use Teddy Roosevelt’s phrase. We literally favor people who not only have enormous amounts of money, but cheat, who don’t pay their taxes, who break the rules.

This is not America. The general public still very much believes that people should pay the taxes they owe. We are not a country that valorizes, that rewards, or that honors people who cheat.But we have become a society that in practice does reward people who cheat.

What does that do to our social cohesion? What does that do to our sense of ourselves as a nation? I think in some ways the moral decay is worse than the numbers, which is saying a lot.

Take care.