Who will pay for the massive US public debt? 30 percent of those with incomes above $10 million audited.

Now that tax seasons is mostly finished for your average American and people can exhale and take a breather, some interesting data is released by the IRS.  Audit data is fascinating because it highlights that in terms of those getting an audit, the more you make the more likely you are to be audited.  It is useful to get a sense of how this plays out.  The IRS is unlikely to audit the average American making $25,000 a year because in reality, the cost and return of going after this group is so minimal.  As the famous bank robber Willie Sutton once replied to a reporter as to why he robbed banks, “because that’s where the money is.”  The government is running lean and as many of you know, carrying over a $15 trillion in public debt is starting to become a burden.  Debt ceiling talks are already out in the open as if we are already preemptively ready to spend more money we don’t have.  Ultimately all Americans will need to shoulder some piece of this debt via cuts or tax increases and that is the painful reality.

IRS audit data

The IRS data is fascinating in terms of where they focus the large portion of their audits:

Source:  Sober Look

You’ll notice that once a $200,000 income is hit, the risk of being audited increases.  I also found it interesting that those reporting no adjusted income had a higher chance of being audited than those who made between $25,000 and $500,000.  This is probably another group that will show up on the radar.  However, those with incomes of $10 million or more have a 30 percent chance of being audited.  Yet as we know many Americans are simply struggling to get by with a per capita income of $25,000.  Our total credit market debt is simply off the charts and over three times annual GDP:

Some serious challenges are coming online in the near future:

-1.  Unemployment benefits are phasing out and expiring for many

-2.  2001 and 2003 tax cuts set to expire

-3.  The debt limit will be reached again by the end of the year

-4.  Payroll tax cut will expire and increase from 4.2% to 6.2%

-5.  AMT will drop from $74,000 or higher to $45,000 or higher.  This will make it harder for middle class families to use deduction in effect creating a tax increase

Many purists would argue that we either go full on tax increases or full on cuts.  The reality is, the economy is incredibly weak.  Most of the economy is still fueled by subsidies via home owner mortgage interest deductions, bailout funds to banks, government backed student loans, food stamps, and unemployment insurance.  In other words, transfer payments are holding many people from full on economic disaster.  For example, 1 out of 3 retirees relies on Social Security for most of their post-work income.

The fact of the matter is we need a combination of both cuts and revenues to simply pull back from the approaching abyss.  Yet Congress is a mess of dysfunction and can’t accomplish anything except collect large salaries for their six-figure pontifications.  Households have been in the process of de-leveraging for some time now:

In other words, most Americans are already doing their part in this austerity process.  Many have less access to debt, have seen no wage increases, and have seen their largest asset in housing collapse.  The problem of course is that this shared sacrifice is being largely being pushed on the backs of working and middle class Americans.  How many have the luxury (or even desire) to renounce their citizenship just to avoid taxes?  The chart above highlights that most of this austerity push has been at the expense of the many.

Outsized gains are flowing to the financial sector that is largely responsible for this economic calamity.  Just recently JP Morgan Chase had a $2 billion gamble loss in their trading unit.  This bank which should be operating as a retail banks is still running like a hedge fund in parts of its business.  Bring back Glass-Steagall.

The IRS data is also telling in the sense that all Americans will feel the pangs of dealing with this massive amount of debt.  It is unavoidable.  Yet when you dig deep, it is unlikely to be paid back by the 46,000,000 on food stamps or the 1 out of 3 retirees on Social Security fully dependent on it for their income.  The young?  Those under 35 have a median net worth of $3,500 and many are in massive debt.  You start running out of places to look for money.  Who will pay for this debt?  In the end, it will be the entire country.

 

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