Tax Gap Flap

March 14, 2007

Lawmakers looking for a way to raise tax revenue without increasing taxes have decided the pot of gold rests with closing the so-called “tax gap.” The tax gap is the difference between what the IRS says people owe and what they pay. Estimates of the tax gap are roughly $300 billion annually.

A number of proposals to address the problem have been floated, but no one has any solid estimates as to how much revenue they would recoup. Further, no one is sure what the added burden of stepped-up enforcement, administrative reform, or stringent reporting standards would cost the federal government or the vast majority of taxpayers who already comply. Nevertheless, Senate Finance Committee Chairman Max Baucus smells blood in the water.

The IRS Commissioner Mark Everson told the Senate Budget Committee last month that “we will never be able to audit our way out of the tax gap.” Still, Baucus wants the IRS to shoot for $30 billion per year. That’s no small potatoes, to be sure. But Everson warns, “we will actually have to complicate the tax laws to go after the non-compliant taxpayers.”

Nina Olson, the National Taxpayer Advocate, says “that an estimated 94% of noncompliance is the result of honest mistakes by tax filers” who already find the tax code too complicated. It appears the “cure” would exacerbate the disease.

And speaking of cures…

Baucus’ counterpart on the Senate Finance Committee, Sen. Chuck Grassley, recently said:

[T]he way people talk around here, they view that the tax gap is a “cure-all.” Have to pay for AMT? Tax gap. Want to expand spending on health care? Tax gap. Balance the budget? Tax gap. Given the amount of faith people have put into it, tax gap has suddenly become one of those magic elixirs the peddlers used to sell in the old west. “It will cure what ails you” was the slogan the slick salesmen used to say. And so the tax gap has become the elixir for all fiscal problems. I’m surprised folks don’t think the tax gap can cure baldness.

Given the number of bald or balding Senators, there may be something to that.

At any rate, something’s fishy. No one’s sure how much we could recoup, or how much it would cost to recoup it, and the proposals to go after it could make the problem worse — yet they push on.

What Baucus called the “crisis of unpaid taxes” barely scratches the surface of our unfunded entitlement liabilities.

Now there’s a crisis.

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