Do Tax Crackdowns on Millionaires Pay Off?


The British government is preparing another tax crack-down on the rich – this time targeting the lesser rich.

Her Majesty's Revenue and Customs has a special “affluence” unit that had already been targeting the 300,000 Britons with assets and real estate of more than £2.5 million, or around $4 million.

Now, the unit is hiring 100 new tax investigators to go after an additional half-million people worth at least £1 million, or around $2.4 million, including the value of their homes.

The staff additions will bring the affluence unit to 300 people. Some argue that people with a total net worth of £1 million aren’t exactly wealthy – especially in Britain’s booming housing market. Yet the Chief Secretary to the Treasury Danny Alexander told the Mail on Sunday newspaper that the program is aimed at getting the wealthy to pay their fair share.

“The wealthiest did best in the boom years and it is right they should pay more now," he said.

The evidence in both the United States and U.K. is mixed on whether crackdowns on the rich meet their expectations. (Read more: Will Tax Hikes Chill Billionaire's Giving?)

A recent report by the Transactional Records Access Clearinghouse at Syracuse University in New York used internal IRS reports obtained from a court order to discern that the Internal Revenue Service's High Wealth Group collected only $48 million in its first two and a half years. It completed 36 audits – or about 14 a year – despite having a staff of more than 100 people.

The IRS disputes the claim, saying the number doesn’t include cases that are still in progress. It said it’s looking at more than 500 tax returns and is looking at another 200 individuals. Yet the agency declined to give a dollar number on its recoveries from the program.

In Britain, the results are stronger. The country’s High Net Worth Unit – which looks at people with assets of £20 million or more – has done better. It was expected to bring in about £100 million a year. In 2011 and 2012, it brought in £200 million. It’s brought in £55 million so far this year, suggesting that the low-hanging fruit may already have been picked in tax-avoidance land.

The hauls from the truly rich are, by nature, going to be larger and more cost-effective than those from the merely affluent. It will be harder to raise substantial sums from people with total net worths of £1 million. (Read more: Study Says Tax Hikes for Rich Don't Spur Growth)

British tax officials have not given an estimate for how its “affluence unit” has done so far. Yet the total number of tax evasion cases pursued by tax authorities has fallen to its lowest level in five years. In 2011-2012, there were 3,346 cases pursued, down from 4,506 in 2010-2011.

Of course, tax laws should be enforced -- on the wealthy and middle class alike. Yet the recent crackdown on wealthy tax avoiders in the U.S. and U.K. looks to be driven as much by politics as by revenue.

-By CNBC's Robert Frank
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