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Thursday, April 19, 2007
Tax Gap Fever
Treasury Secretary Henry Paulson thinks we have no choice but to let people evade taxes, apparently. Having just paid my taxes, I find that a little annoying.
In testimony before Congress yesterday, Paulson made a case for restraint in closing the the tax gap, which is a sanitized way of putting the annual total of tax evasion, avoidance and errors (noncompliance, in tax speak). IRS estimates the tax gap to be at $353 billion a year, or about 16 percent of total taxes owed.
So why can't we go after this money? Here's Paulson:
"There is a big part of the tax gap that we simply won't be able to reach without adding draconian and painful requirements on all taxpayers," Paulson said.
All taxpayers? But not all taxpayers are noncompliant. Indeed, the IRS collects 99 percent of the taxes on income earned from wages and salaries. It's business income, and income from capital gains and dividends, that the IRS has trouble getting a hold of (See this EPI report for more).
So no, reducing noncompliance would not add any type of requirement for most taxpayers. Businesses and wealthy people would be most affected. That's who doesn't pay up.
But Paulson is right that this issue does affect all taxpayers- it's everyone that loses out when people don't pay their taxes. It's compliant taxpayers that in the long run have to pay more taxes to make up for what noncompliant taxpayers don't pay. It's everyone that could use more funding for education, or infrastructural investment, or solving our health care crisis. And it's everyone that has to pay for unnecessary deficit spending and debt.
Those "Draconian and painful" consequences that Paulson mentions are real, and they're already present. They're the consequences of not doing anything about the tax gap.
Posted by Matt Lewis
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