Interesting article in today’s New York Times:  Surprising Finding in Capital Gains Study, by David Cay Johnston:

Capital gains are the most highly concentrated form of income, with just 10,000 or so taxpayers earning a third of all profits from selling investments and only 3% of gains going to people who make less than about $50,000. So could it be that most of the tax cheating on capital gains income, as measured in dollars, is by people at the lower end of the income ladder? That was the observation made Thursday in a letter by Thomas A. Barthold, acting chief of staff for the Congressional Joint Committee on Taxation. The letter was addressed to Representative Rahm Emmanuel, a Chicago Democrat who wants to crack down on tax cheating, especially by investors. Mr. Emmanuel said he did not believe the conclusion.

Mr. Barthold wrote in the letter, “The majority of the dollar amounts of underreported capital gains income from securities transactions” were among people in the 10% and 15% income tax brackets. That would mean people with taxable incomes of no more than $30,650, which in most cases means people with total incomes, before deductions, of less than $50,000. Taxpayers with incomes of $50,000 or less earned about $15 billion of the total of $471 billion in long-term capital gains reported in 2004, IRS data shows.

Jay A. Soled, a professor of business at Rutgers University who has made several studies of tax cheating, said he doubted it was true that most of the cheating was by lower-income people. “It seems mathematically impossible.” “So the culprit in capital gains cheating is Joe Sixpack?” Professor Soled asked. He said the finding was at odds with his own studies and a 1979 IRS study that he considers much more thorough than the much smaller study cited by Mr. Barthold. He called for full disclosure of the details of the I.R.S. study and any other documentation supporting what Mr. Barthold wrote.

The IRS has told Congress that it taxes 99% of wage income, but only about 70% of nonwage income. The disparity is largely because of different reporting rules. Employers tell the IRS how much workers make, but Congress trusts business owners and investors to report their income with little or no verification. In the case of securities, the only reporting is of the proceeds from the sale of stocks or bonds. The price paid to acquire the securities is not reported and thus taxpayers can cheat by inflating the price paid. Professor Soled said there is significant evidence that many taxpayers make up the purchase price they report.

For more, see Kay Bell.