Democrats in Congress are desperate to do something about the so-called tax gap, but they know that if they raise taxes, they’ll be out on their asses in 2008. So they’re going to try to squeeze ordinary Americans a little differently.
Senate Finance Committee Democrats on Thursday called for Treasury Secretary Henry Paulson to find a way to close the “tax gap,” or the amount of taxes Americans pay versus what the Internal Revenue Service thinks they owe.
In 2001, the last year the IRS actually has data for, the tax gap was estimated at $345 billion, of which the IRS expected to collect only $55 billion through enforcement actions.
“The tax gap is simply not a pot of gold that we can dip into every time we want to pay for a new or expanded program,” Paulson told the Senate Finance Committee. “Nor should it be viewed as an easy solution to existing challenges,” such as replacing the alternative minimum tax.
Democrats bristled at Paulson’s remarks and accused the administration of failing to take seriously its duty to enforce the nation’s tax laws. Finance Committee Chairman Max Baucus (D-Mont.) demanded that Paulson return in July with a strategy for increasing the voluntary compliance rate to 90 percent by 2017 from 84 percent, a change he said would increase tax collections by $150 billion a year.
“I know there is no magic solution to the tax gap,” Baucus said. “But that doesn’t mean there is no solution to the tax gap.”
During testimony, Paulson said other tax-gap ideas floating around Washington “would be unnecessarily painful, expensive and time-consuming for taxpayers.” Politicians haven’t endorsed the more extreme notions, but Paulson cited some anyway — steps such as eliminating most cash transactions or tripling the number of IRS audits.
“In theory, each of these measures could bring in some additional revenue,” Paulson said. “But the cost of compliance for individuals and businesses — most of whom already pay what they owe — would far outweigh the gains.” — Washington Post
In other words, the Democrats are prepared to spend even more money than increased enforcement and information collection activities would return to the government, just in order to get the 16% of Americans who regularly give the IRS the finger to stop resisting the robbers and give up their money like good little sheep.
“Paulson’s testimony is particularly refreshing since the IRS has been using the issue to seek a bigger budget and more power,” says Daniel Mitchell, senior fellow at the Cato Institute. Mitchell advocates for a flat tax and international tax competition to drive down worldwide tax rates.
Driving down taxes through market forces sounds like a good idea to me. It seems to be working well in Europe; it’s certainly got the EU, which wants to “harmonize” taxes across EU member states by raising them to the same uniform rate, running scared.