Macro Roundup

Gerald Auten and David Splinter, "Comment: Tax Evasion at the Top of the Income Distribution: Theory and Evidence," Working Paper, May 5, 2021, http://www.davidsplinter.com/AutenSplinter-TaxEvasion.pdf

Their takeaway, “…While some increase in high-income audit rates may be appropriate, additional enforcement resources could also help audit selection by better identifying returns with lower reported incomes but higher likelihood of evasion. The combined efforts and increased cooperation of IRS divisions could lead to improved methods of selecting returns for audit and help maintain high ROIs for enforcement activities…. We note in this comment, however,that estimates of evasion not detected in NRP audits using simple DCE multipliers and allocating in proportion to reported income are not distributionally consistent. Moreover, we believe these approaches tend to overstate true top incomes and underreporting rates. We suggest alternative methods that would be more distributionally consistent. These suggest substantially less impact of evasion on top income shares. We are aware that there is considerable additional sophisticated evasion by some high-income individuals not found in NRP audits….”

They make the case this overstates the top income share, “.. Two-thirds of the estimated increase in top income shares results from applying DCE multipliers. This approach causes exaggerated upward re-ranking of returns with large amounts of detected evasion,shifting estimated evasion from the bottom and middle to the top of the income distribution. The second largest increase in top shares results from allocating additional passthrough evasion by reported income. However, returns with business losses appear to be allocated little additional evasion despite accounting for over one third of evaded income….While offshore evasion has received considerable attention, it accounts for only a small portion of the total effect on top income shares….”
Bottomline, “…National accounts explicitly break out proprietor evasion (combined amount for sole proprietors and partnerships) of $561 billion and wage evasion of $75 billion when averaging 2006-2013 (at 2012 dollars). Auten and Splinter (2019a, online data Table T1) provide estimates of likely evasion in national accounts for other income sources. For 2006-2013, there is annual evasion of about $44 billion for farms, $43 billion for rents, and $80 billion for S corporations. To compare with GLRRZ, there are smaller amounts for dividends and interest evasion that should be added and non-filer portions that should be removed from the values above. If we assume the former is $50 billion and the latter is 10 percent,this suggests about $770 billion in filer evasion in national income. In comparison, GLRRZ add $1,304 in audit-based evasion in 2012 (Table A6, exam and DCE columns). But this amount includes capital gains realizations that are not in national income. Excluding $70 billion in added evaded capital gains (5.3 percent of total based on Table A1) suggests that GLRRZ add audit-based filer evasion comparable to national income definitions of about $1,230 versus about $770 billion in national income.11 Therefore, the GLRRZ filer evasion estimate appears to exceed amounts in national income by $460 billion, or more than one half.This represents an additional 3 percent of national income…”

They describe Zucman’s methodology, “…GLRRZ’s analysis has four steps. First, it uses audit study micro data to add detected evasion. Second, GLRRZ imputes undetected evasion using a set of multipliers developed from earlier audit data. These multipliers are from detection-controlled estimation (DCE) and can nearly quadruple the amount of evasion in audit studies.Third, it adds imputations of additional evasion from passthrough entities (including partnerships, S corporations, and certain other sources). The amounts already in the NRP audits are removed and then this assumed total passthrough evasion is allocated by reported income, such that essentially all goes to the top of the distribution. Fourth, GLRRZ estimates how income from offshore wealth affects income distributions... Combining the four components of estimated evasion, GLRRZ argue that top 1% fiscal income shares increase by 1.5 percentage points (pp). This includes a 0.5pp decrease from detected evasion, 1.1pp increase from undetected evasion using DCE multipliers, 0.6pp increase from additional business evasion, and 0.3pp increase from income of offshore wealth..”

Ben and I both read Auten and Splinter arguing Zucman and his fellow travelers are likely overstating tax evasion at the top. However they don’t have a quantification table in the paper so we can’t exactly draw out the calculation you were interested in. AS do note a directional answer in the text, “…this suggests about $770 billion in filer evasion in national income. In comparison, GLRRZ add $1,304 in audit-based evasion in 2012 (Table A6, exam and DCE columns). But this amount includes capital gains realizations that are not in national income. Excluding $70 billion in added evaded capital gains (5.3 percent of total based on Table A1) suggests that GLRRZ add audit-based filer evasion comparable to national income definitions of about $1,230 versus about $770 billion in national income.11 Therefore, the GLRRZ filer evasion estimate appears to exceed amounts in national income by $460 billion, or more than one half…”

Core findings, one"…Market concentration in U.S. manufacturing, adjusted for foreign firms, remained stable between 1992 and 2012. ... once the market shares of foreign firms are taken into account, we find that market concentration did not rise but instead remained flat between 1992 and 2012.... Furthermore, our results are not driven by just a handful of industries. We find that the inclusion of foreign firms in the market concentration measure attenuates the rise in concentration between 1992 and 2012 in a broad range of industries...."

Two, "...Foreign firms have increased their presence among the top 20 firms, but their share in the top 20 remains low. Foreign firms’ largest growth has been in the bottom part of the sales distribution…we reconcile the flat trend in overall market concentration with the previously documented rise in domestic concentration by showing that the growth of foreign firms’ market shares was mostly at the bottom of the sales distribution...Our comprehensive firm-level data allows us to pinpoint which part of the market share distribution foreign firms enter. We find that the entry of foreign firms with small market shares counteracted the increase in concentration among U.S.-based firms, generating the flat trend in overall concentration..."
Three, "…. market concentration fell mostly in those industries with high import penetration in 1992, which are also those industries that experienced the fastest growth in import competition over the following 20 years. In contrast, concentration rose in industries with low import penetration. Effectively, domestic and overall concentration differ the most in industries where foreign firms play a significant role. For example, import-competing industries, such as electronics, are the ones that were further liberalized and became less concentrated. By contrast, industries like concrete remain fairly closed to trade and thus do not face the increased competition from foreign firms...."
Evidence, “...Is the stable trend in market concentration driven by a few large industries or does foreign competition reduce concentration more broadly? To explore this question, Figure 2 plots the change between 1992 and 2012 in the top 20 domestic concentration measure on the x-axis against the change in the top 20 overall market concentration measure on the y-axis as a bin scatter. We bin the industries by ranking them by the change in their domestic concentration measure, and then combine them into 20 groups of 8-9 industries each.7 Each bubble depicts one of these groups, with the size of the bubble proportional to the industry group’s total absorption, defined as total shipments by U.S. firms minus exports plus total imports. The figure shows that nearly all of the bubbles are below the 45- degree line, indicating that accounting for foreign firms’ sales in the U.S. results in a smaller increase in concentration in almost all industry groups than the domestic concentration measures would suggest. However, there is a wide range in the size and direction of changes in concentration, and even with the full measure concentration rose in a number of industries, as shown by the bubbles in the top right quadrant. The reason the entry of foreign firms did not increase market concentration is because their entry and growth was mostly in the bottom part of the market share distribution, with the loss in domestic shares completely offset by the gain in foreign shares as predicted by models with a Pareto distribution. Combining the foreign firm-level sales data with those of U.S. firms reveals the following novel fact…. Thus, the height of the first bar shows that the market share of all of the number 1 ranked firms amounts to 12 percent of all manufacturing sales in 1992.8 We split each bar into the market share accounted for by domestic firms in blue and by foreign firms in red. It turns out that foreign firms with rank 1 account for a market share of virtually zero in the aggregate. This is mostly due to the fact that there are very few industries where foreign firms rank in the top 20. Consequently, nearly all of the market share of firms with rank 1 is accounted for by domestic firms. To see how these patterns evolved over the sample period, we plot the analogous information for 2012 with lighter colors. A clear pattern emerges, showing that the largest growth in foreign sales is in the bottom part of the distribution. Foreign firms with a rank higher than 50 more than doubled their market share from 6.9 percent to 14.4 percent. By contrast, the foreign shares of the top ranked firms remained low on average, below 3 percent for each of the top seven bins..."