Taking on the Tax Gap
GAO Says Complexity Undermines Compliance
In a new report, U.S. Comptroller General, David Walker, CPA, tells the Senate Budget Committee that Congress must simplify the tax code if we really want to close the $345-billion-a-year revenue shortfall.
Walker:
Our nation?s fiscal policy is on an imprudent and unsustainable course. As long-term budget simulations by GAO show, over the long term we face a large and growing structural deficit due primarily to known demographic trends, rising health care costs, and lower federal revenues as a percentage of the economy. GAO?s simulations indicate that the long-term fiscal challenge is too big to be solved by economic growth alone or by making modest changes to existing spending and tax policies. Rather, a fundamental reexamination of major policies and priorities will be important to recapture our future fiscal flexibility.
Under-reporting of income by businesses and individuals accounted for most of the estimated $345 billion tax gap for 2001, with individual income tax under-reporting alone accounting for $197 billion, or over half of the total gap. Corporate income tax and employment tax under-reporting accounted for an additional $84 billion of the gap.
Reducing the tax gap would help improve fiscal sustainability. Given the tax gap?s persistence and size, it will require considering not only options that have been previously proposed but also new administrative and legislative actions. Even modest progress would yield significant revenue; each 1 percent reduction would likely yield nearly $3 billion annually. Reducing the tax gap will be a challenging long-term task, and progress will require attacking the gap with multiple strategies over a sustained period. These strategies could include efforts to regularly obtain data on the extent of, and reasons for, noncompliance; simplify the tax code; provide quality service to taxpayers; enhance enforcement of tax laws by utilizing enforcement tools such as tax withholding, information reporting, and penalties; leverage technology; and optimize resource allocation.
Download the 25-page GAO report (PDF) and the IRS Tax Gap Figures (PDF).
Some comments may be held for review before posting.