The return of the tax gap hype
Every policy wonk will tell you that after you live in Washington long enough, you start seeing the same issues reemerge on a regular basis. Common ones are praise for the magical ability of government spending to help pay for itself during recessions and handwringing over the myth of middle-class stagnation. And when Uncle Sam’s coffers are empty, everyone suddenly remembers the so-called tax gap — the difference between the tax revenues Congress expects versus those it actually collects. So right on cue, calls to reduce the tax gap are back.
The U.S. budget deficit is even higher than what we’ve become accustomed to. President Joe Biden and his band of congressional superspenders are eager to extend many emergency programs, such as paid leave and child benefits, as well as spend a few trillion more on infrastructure and “stimulus.”
While politicians have no problem leaving the bill for future generations, today’s leaders like collecting rich taxpayers’ money even more. But increasing taxes is hard, so Democrats are turning their attention to the difference between taxes owed and taxes collected. Many politicians consider this a pain-free source of new funding.
According to the Department of the Treasury, the tax gap was $600 billion in 2019, and it projected to roughly 15 percent of taxes owed over the following decade. In 2006, this gap was $450 billion, up from $255 billion in 2001, and around 15 percent of taxes owed. If “closing the tax gap” were indeed an easy way to raise money, this gap would have been closed decades ago.
The traditional argument is if we beef up the Internal Revenue Service’s budget and grow the ranks of its auditors, we won’t have this problem.
The low-IRS-budget argument overlooks this reality: While the taxpayer services budget of the agency hasn’t grown much, the agency’s welfare-handout budget has exploded from $44 billion in 2000 to roughly $216 billion this year. And these figures don’t include 2021’s $650 billion in COVID-19-related payments.
The bottom line is money isn’t the issue with the IRS. The problem is the lack of focus on its core mission. While IRS agents aren’t doing as much to take taxpayers’ dollars away as Congress wishes they would, the agency has an abysmal record serving taxpayers who are trying to navigate the roads leading to tax compliance.
In theory, more money in the IRS budget means more agents to help taxpayers comply or to track down tax evasion. But it requires some serious tradeoffs with civil liberties.
Don’t expect much success on the revenue front. As several IRS reports and task forces have revealed, when it comes to closing the tax gap, enforcement is the costliest option and delivers only limited revenue.
There is one sure way to reduce the tax gap: Cut taxes until there is less incentive to evade the taxman. That requires our enormous government to become less gluttonous with the people’s resources. It is not a pain-free solution for politicians accustomed to feasting on current and future taxpayers’ dollars, but it would work.
Veronique de Rugy is a nationally syndicated author.