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TAX GAP VS. LOGIC GAP

March 15, 2007

The Tax Policy Blog has a sensible discussion of how the tax gap is percieved as the fabulous fountain of funds by Congressional taxwriters:

A number of proposals to address the problem have been floated, but no one has any solid estimates as to how much revenue they would recoup. Further, no one is sure what the added burden of stepped up enforcement, administrative reform, or stringent reporting standards would cost the federal government or the vast majority of taxpayers who already comply. Nevertheless, Senate Finance Committee Chairman Max Baucus smells blood in the water.

The IRS Commissioner Mark Everson told the Senate Budget Committee last month that "we will never be able to audit our way out of the tax gap." Still, Baucus wants the IRS to shoot for $30 billion per year. That's no small potatoes, to be sure. But Everson warns, "we will actually have to complicate the tax laws to go after the non-compliant taxpayers."

There is no doubt a "tax gap." There is simply no way that the IRS will ever capture every last penny from every nail salon, restaurant or self-employed tradesman out there. And nobody would want to in a country with the amount of enforcement you you need to do so.

The question is, how much of that gap can reasonably collected? The only remotely practical steps are to increase third-party information reporting requirements. That's why we're likely to see brokers required to report stock basis information to the IRS, and why the eBays, PayPals and credit card companies are likely to have to report remittances to enable the IRS to sniff out non-reporting vendors. Beyond that, only so much additional enforcement is possible before it drives people nuts.

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