The invisible trillion

THE DEBATE over taxing the rich is, at bottom, a debate about new taxes: a wealth tax on fortunes above $50m, taxes on billionaires' unrealised gains, surtaxes on the returns to capital. Yet the largest tax on the rich already exists. It is not called a tax on the rich; it is the tax gap—the difference between what the wealthy owe under current law and what the Internal Revenue Service manages to collect. On the IRS's own figures the gap ran to roughly $700bn in 2022, and a former commissioner of the agency put the true number near $1trn once the hardest-to-see forms of evasion are counted. The argument about taxing the rich has been roaring on as though that money did not exist.

The reason is institutional, not economic. America's code is a system of self-assessment disciplined by information: taxpayers declare, and third parties verify. Where the state can see an income, people pay. Wages, which employers report on form W-2, are captured almost completely; the misreporting rate is about 1 per cent. Where the state is blind, people improvise. Income from unincorporated businesses is misreported more than half the time. Around 61 per cent of the gap is unpaid tax on business and self-employment income, and the largest single slice of individual under-reporting comes from the pass-through entities—partnerships, S-corporations and sole proprietorships—through which the affluent conduct much of their financial affairs. The tax gap is thus the mirror image of progressivity: the more opaque your income, the richer you may be, and the more your tax bill can shrink.

Leaked IRS records made the point vivid. Jeff Bezos paid no federal income tax in 2007 and 2011; Elon Musk did the same in 2018. Their fortunes grew; their tax bills did not follow.

The revealing part is what happened when the government briefly tried to do something about it. In 2022 Congress gave the IRS $80bn over a decade, with $45.6bn earmarked for enforcement against high earners and corporations. The experiment worked while it was funded: before the money ran out the agency reported collecting $1.3bn from the rich in a few quarters, including from those who had simply declined to file since 2017. Then Congress set about dismantling it. Within three years it had rescinded or frozen $45.3bn of the $45.6bn, and only $3.5bn was ever spent on the task. The first clawback, of $1.4bn, arrived in the debt-limit deal of 2023; the big one came in March 2024, when Democrats traded away $20bn of it to win higher caps on discretionary spending; a continuing resolution later repeated the cut a third time.

The defunding was sold as liberation—from a taxman imagined as a weapon of the left against small business. Whatever its rhetoric, its consequence is the destruction of the state's ability to see its richest citizens. Staffing now stands at a level last seen in the 1960s, roughly 50,000 employees, after the loss of some 27,000 people in 2025, including a third of the revenue agents whose work examines the wealthy; yet the number of returns filed has grown to about 267m. Discretionary funding for the IRS's core functions has fallen by a third in real terms since 2020, to $9.9bn, and the next budget shaves direct appropriations again. Most tellingly of all, the agency has postponed its overdue study of the tax gap. A government choosing not to measure a leak that costs $700bn a year is a government that has decided, in effect, not to believe in it.

The economics makes the politics look perverse. The Congressional Budget Office puts the return on enforcement spending at $6.40 in revenue for every dollar spent; audits of the richest tenth of households return about $12 per dollar and of the top 0.1 per cent roughly $26. An extra hour spent auditing someone earning over $5m produces about $4,900 in recommended tax, against $650 for an audit of a $200,000 earner. The Yale Budget Lab calculates that the staffing and funding cuts now in train will cost the Treasury about $861bn of revenue over the coming decade. Set against that, the gap is on course to total some $7trn over ten years—roughly a third as large as the deficit, which the Congressional Budget Office projects at a deficit of $1.9trn this fiscal year. Put another way, the federal government borrowed $1trn in the first five months, about as much as the leak lets slip in a year. Whatever virtues are claimed for cutting the taxman, fiscal prudence is not among them.

The case for a wealth tax deserves to be answered at full strength. The income tax, its advocates say, fails because the truly wealthy do not draw salaries; they borrow against their stock, and their gains crystallise only decades later, if at all. Tax the unrealised, and you finally reach them. True, and the politics of it is real enough: a wealth tax on fortunes above $50m has been reintroduced in Congress this year, and a 5 per cent annual tax on the country's 938 billionaires has qualified for California's ballot. But wealth taxes are an administrative minefield—valuations are fought, wealth moves, and Europe tore most of them up after watching capital flee. The deeper problem is that the two approaches are not even rivals. A billionaire minimum tax still has to be administered: it requires an IRS capable of peering into partnerships and trusts, which is precisely the capacity being dismantled. Enact every new levy the imagination can supply; if the collector cannot see the income, the liability quietly joins the gap, and the gap relocates the bill to everyone the state can see—other taxpayers today, borrowers tomorrow.

The prescription follows from the diagnosis, and it is deliberately unglamorous. The first task is to extend the reporting that already works. Where third parties report income—employers, banks, platforms—evasion collapses to negligible levels; apply the same principle to business-to-business payments, contractor income and financial accounts, and the gap shrinks without a single new audit. The second is to rebuild capacity and to treat it as the self-financing infrastructure it is, protected from the annual appropriations war that keeps gutting it. The third, and hardest, task is political: to stop treating the tax collector as a tribal trophy, so that funding it ceases to be a surrender by one side and becomes what it always was, a shared act of arithmetic.

There is a paradox at the centre of the whole affair. Every faction in the argument agrees that the rich should pay more. The richest would pay more tomorrow if the government would only pay to look for them—and stopped pretending that a statute is a substitute for a taxman.