Two months ago, we posted a Wire entitled “Hit and Run Economics” that highlighted a new NBER Working Paper – coauthored by Gabriel Zucman – that claimed the Tax Gap is much larger than previous estimates and exceeds $1 trillion a year.

At the time, we predicted the shelf life of the “study” would be a few months, because that’s how long it would take real economists to digest the work and correct it.  Zucman and his frequent collaborators Piketty and Saez have a long history of publishing questionable papers that fail to stand up to scrutiny.

In this case, it only took a few weeks before the new paper’s flaws became apparent.  A response by economists David Splinter and Gerald Auten has dissected Zucman’s work and found numerous flaws, including the misuse of detection-controlled estimation (DCE) multipliers resulting in an upward bias in top shares and the misallocation of additional passthrough evasion estimates, nearly all of which are attributed to the top 1 percent.   It’s pretty technical stuff, but then it needs to be.  The bottom line is that much, if not all, of the new-found tax gap disappears when these errors are corrected.

Beyond questionable methods, the Zucman paper is also sorely out-of-date.  As Lee Shepard reports this week, the paper is based on 2012 taxpayer data that doesn’t capture new FACTA and other reporting requirements implemented in the ensuing years:

Well, gee, don’t we have FATCA for offshore accounts? Didn’t Congress ramp up FBAR penalties? Didn’t we scare rich Americans out of Switzerland? Didn’t banks spend billions to tip new customers upside down for their passports? The NBER study concludes, using data before FATCA went into effect, that most offshore wealth is undeclared.

FATCA is not self-implementing. The first batch of final FATCA regulations became effective beginning in 2014, but reporting compliance by banks didn’t really get going until 2015 and 2016 due to a number of extensions along the way, while the data the economists used ended in 2012 and 2013 (T.D. 9610, T.D. 9808, T.D. 9809, T.D. 9852). The bottom line is that the NBER economists were looking at crusty old pre-FATCA data to argue that offshore accounts were a big problem.

Despite this shaky foundation, the “story” that the rich are cheating the US government out of $1 trillion a year is driving a big part of the tax narrative in Congress.  What’s the old Mark Twain line about a lie making it halfway around the world before the truth puts its shoes on?  This case mirrors the comedy, as the troubled Zucman tale of massive overseas cheating was immediately embraced by the IRS Commissioner, the Biden administration, and numerous academics, all of whom have been available to testify before friendly Senate Committees, and all this taking place before truth tellers like Nina Olson and others can correct the record.

So there you have it.  Hit and Run Economics indeed.  They use questionable methods and outdated data to malign an entire segment of Americans, and then rush to enact legislation before anybody notices their estimates are crap.  Whoops, too late.  We noticed.