Do the Top 1% Really Cheat on Their Taxes?

There has long been a notion that because many of the top 1% pay little to no taxes that they are cheating, but is that the reality? To many, that assertion seems logical, but those who understand the tax law know that the top 1% is in fact being rewarded by the government for stimulating the economy.

How the 1% pays so little in taxes

If you’re not familiar with tax law, it’s important to know that it is written as a series of incentives for business owners and investors because those specific activities spur economic growth. As a result, the top 1% use the opportunities presented in the tax laws to legally reduce their taxes. So it's not exactly cheating; these individuals hire tax strategists to help them work within the bounds of the law to reduce their taxes to zero.

Related: How Will the Biden Tax Plan Affect Your Small Business?

Avoidance and evasion are different

To accuse clients of cheating with no knowledge of their finances other than the fact that they make a significant amount of money is accusing CPAs of cheating. CPAs have an ethical standard, a license standard and an IRS standard, and no credible CPA would risk their license to support cheating. A CPA will help a client avoid taxes, not evade them and to equate the two is dangerous. Evasion is illegal, avoidance methods like tax deductions and credits are what taxpayers are supposed to claim. In my experience, most tax cheating is done by middle income taxpayers via undocumented charitable deductions and taking personal expenses as business deductions. Typically, as supported by IRS studies, most cheating happens on a Schedule C used by sole proprietors.

Tax incentives aren’t loopholes

Tax incentives are a tool used by the government to promote particular actions; they are not a loophole. Loopholes are unintended consequences, while incentives are opportunities with intended consequences. For example, if we weren’t allowed to take a mortgage deduction, people wouldn’t have an incentive to buy homes. If we weren’t given to take education tax credits, people wouldn’t have the same incentive to send kids to college. Tax credits have long been used to specifically promote many social programs as well as economic activities.

To put it simply, it’s far more likely that the majority of the 1% are legally following the current tax law as it is written. If lawmakers would like them to pay more in taxes, they will need to change the law to eliminate the many existing incentives.

Related: What Is Modern Monetary Theory?