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Tuesday, January 23, 2007
Tax Gap Hearing: Consensus and Contention
The Senate Budget Committee held a hearing today on the $345 billion tax gap- or the difference between what people owe the federal government and what they pay. Overall, there was consensus that a) the tax gap does exist in huge proportions, b) we must do something about it and c) we must try to minimize doing harm to compliant taxpayers when we address the tax gap.
The witnesses, and the Senators in attendance weren't all of the same mind on many important things, though. One point of confusion (more than contention): exactly how big the tax gap is. The data everyone had to go on comes from an IRS research project whose methods seem pretty unreliable. Budget Committee Chairman Sen. Kent Conrad (D-ND) and Robert McIntyre of Citizens for Tax Justice (testimony here) think that the gap is probably much higher than IRS estimates, partly because the data is bad and already out of date, and partly because of the many tax-dodging activities that the research project did not account for.
There was serious contention (and not confusion) over what we know about the causes of the tax gap. John Satagaj of the Small Business Tax Compliance & Fairness Coalition (testimony here) testified to the importance of understanding the nature of tax non-compliance prior to addressing it. Satagaj claimed that nobody really knows why people don't comply with the tax law. Until we know why they aren't complying, he said, we won't be able to keep them from cheating or making errors. However, McIntyre and Michael Brostek of the GAO (testimony here) testified to the many causes of the tax gap that are quite well-known: a lack of disclosure for certain sources of income, offshore accounts, a lack of clarity in the tax law, and inadequate audit rates, among others.
Yet Satagaj still claimed that until we know exactly what's going on, we shouldn't take action. But the problem is, as McIntyre noted, nobody will know the exact size and causes of the tax gap until action is taken. So much income is kept in secrecy that no research effort would disclose this information. It can only be brought into the light of day by changing the rules of the game.
Addressing the tax gap is a gamble, but unless we don't want to do it, there is no risk-free option.
One final point of contention, of course, was what we should do about the tax gap. McIntyre said his two priorities were disclosing offshore tax shelters (which Sen. Conrad strongly supported) and stepping up IRS resources and audits. Brostek said increasing income reporting and simplifying the tax code. And Satagaj said "education."
Brostek and McIntyre were right on the money. Education, however, is far and away an insufficient way of closing the tax gap. Call me jaded, but I think anyone using an offshore account to hide their income is well aware of the ins and outs of the tax code. What is it about effective tax collection that Satagaj, who represents ostensibly honest small businesses who are at a disadvantage when competitors cheat on their taxes, is so afraid of?
Posted by Matt Lewis
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