Politics & Policy

Gaps in Logic

A taxing problem.

There is no such thing as a free lunch, and pots of gold at the end of the rainbow only exist in fables. Today, the House Budget Committee will consider a blueprint for government taxation and spending that purports to balance the budget by closing the “tax gap” — the portion of federal taxes that the Internal Revenue Service believes goes uncollected. Under the PAYGO rules imposed by the new Democratic congressional majority — which require new spending to be offset by higher taxes or cuts elsewhere in the budget — the tax gap has become a mirage in the budgetary desert.

Everyone should pay the taxes they owe. That is beyond dispute. But before we chase after the liberals’ latest fiscal elixir, we should clearly understand what the tax gap is, and the unintended consequences that would result from trying to significantly reduce it.

According to the Treasury Department, in 2001 (the last year for which there are detailed figures) there was a tax gap — the amount of taxes due that were not paid — of about $295 billion. The bulk of the tax gap is the result of underreported income, but there is no single “silver bullet” to end the underreporting. Individuals, estates, corporations (large and small), and the self-employed — at times and to differing degrees — all underpay their taxes.

Since 2001, the IRS has stepped up its collection efforts, generating $48.7 billion in fiscal year 2006, up from $32.9 billion in fiscal 1999. In 2004, Congress authorized the use of private debt-collection agencies to help close the tax gap, a move that has proven extremely successful: The collection of unpaid taxes is rising quickly. In addition, the president’s budget for next year proposes several new initiatives to close the tax gap, and commits additional resources toward IRS-enforcement efforts.

All this said, we can and should take common-sense steps to increase the collection of unpaid taxes. But it would be easy to go too far and create a bureaucratic nightmare for the American people.

According to the IRS, roughly two-thirds of the tax gap in 2001 could be traced to individual income taxes, while less than 10 percent traced back to the corporate income tax. Thus, in order to close the current tax gap, the IRS largely will not be going after those big, bad corporations of the liberal imagination. Instead, it will be spending more time and money targeting John and Jane Taxpayer.

The first step in this process likely will come in the form of onerous new rules for individuals and small businesses. For instance, taxpayers may be required to report purchases at comic-book conventions and baseball-card shows, or file tax forms for the plumber who fixes the sink or the kid down the block who mows the lawn. In addition, the frequency and aggressiveness of audits is almost certain to rise.

And past experience shows us that the IRS can, and has, overstepped its bounds in the name of collecting more taxes. In the 1990s, the Senate Finance Committee held a series of hearings on taxpayer abuse by the IRS. A parade of witnesses, including former IRS agents, told of average Americans who were hit with massive tax penalties in the face of an unresponsive bureaucracy.

Take Nancy Jacobs, whose husband was an optometrist in Southern California. She testified that her family received an IRS bill for $11,000 out of the blue, and that they were forced to pay money they didn’t owe after the IRS threatened to shut down her husband’s practice.

Or Monsignor Lawrence Ballweg, a priest from New York, who testified that after his mother’s death he became the trustee of her estate. Ultimately, because he was unable to comply with IRS requests (in large measure because the IRS refused to share pertinent information with him), the IRS threatened to seize his assets, including his bank account, to pay a supposedly unsatisfied judgment of $18,000.

And then there’s Tom Savage, who owned a construction-management business in Delaware. He told the committee that he and his family

were unfortunate to have been the subject of a zealous, unrelenting, and abusive pursuit by an IRS Revenue Officer. … when the forces of the government are unleashed on you, you are in trouble, no matter how good your case. Few people know what it is like to be in the cross-hairs of the IRS. We unfortunately do.

Savage told the committee that he ultimately agreed to let the IRS keep $50,000, an amount he felt he did not owe because “the litigation was bankrupting our company financially and us emotionally. … The government had endless resources to drag the case out. We did not.”

There is a better way. Perhaps the most effective means of closing the tax gap is to simplify the code. Honest mistakes by taxpayers trying to comply with their obligations are a major component of the tax gap. Surely, effective tax reform and simplification are a better option than increasing government power and giving federal bureaucrats a mandate to harass taxpayers in the name of a fiscal phantasm.

– James McCrery is a Republican congressman from Louisiana and a ranking member of the House Ways and Means Committee.


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