The `Tax Gap' and Enforcement
DURING the election campaign, George Bush pooh-poohed Michael Dukakis's suggestion that some portion of the budget deficit could be covered by better enforcement of the tax code or an amnesty program. New numbers on the so-called ``gross tax gap'' - taxes owed but not paid voluntarily to the Internal Revenue Service - indicate that Mr. Bush might want to think again about this possibility.
That gap, estimates IRS economist Berdj Kenadjian, reached $84.9 billion last year and could amount to $87.1 billion this year and $113.7 billion in 1992.
Bush said Mr. Dukakis' plan to collect $35 billion in delinquent and evaded taxes annually would require an ``auditor army'' of 105,000 new IRS employees. He didn't point out that this meant these auditors would collect on average $333,000 apiece from individuals or corporations that hadn't paid their fair share of taxes.
Rather, Vice-President Bush announced his plan for a ``taxpayers' bill of rights.'' He noted: ``The IRS has many fine and dedicated individuals, but even so, as an institution it can be high-handed. Sometimes it seems to treat innocent people as if they were presumed guilty.''
That bill of rights may well be needed. But more compliance efforts may also be required to assure honest taxpayers that they aren't being suckers by paying their due taxes promptly.
To assess properly the amount of potential revenue here, the gross tax gap figure should be reduced by the amount the IRS already collects as a result of its enforcement activity. New, more accurate estimates of that ``net tax gap'' are to be released in a few weeks.
However, we do know that IRS compliance procedures are presently bringing in something more than $20 billion a year. That sum includes interest and penalties on unpaid taxes, and is for other complex reasons not strictly comparable with the net tax gap. Nonetheless, this would imply that there still is something under $67 billion awaiting collection by the IRS.
The new figures will make an informed guess on what portion of the net tax gap is economically feasible for collection by the IRS. Even 20 percent ($13 billion perhaps?) of such a sum would make a good dent in the deficit, which amounted to $155 billion for the fiscal year ended last Sept. 30.
And if a tax amnesty program, such as that successfully instituted by the state of Massachusetts, was introduced at the federal level, this might bring in several billions of dollars.
George Guttman, a Washington expert on tax amnesties, notes that one such program just completed by Ireland brought in 10 times more revenue than anticipated. Amnesties work best if combined with new tax compliance efforts.
A combination of fear and conscience apparently proves more persuasive with delinquent taxpayers.
Another revenue-raising measure would be to provide the IRS with more modern computers, says Thomas Field, publisher of Tax Notes. With more computing power, it could better massage any available information to find out tax cheaters.
The tax gap is composed of unpaid income taxes on legally earned individual and corporate income. The gap is created when persons or companies overstate deductions, credits, or exemptions; understate income; or make math errors on their tax returns. Also, some individuals and corporations simply fail to file tax returns, or do not voluntarily pay taxes they do report.
In 1987, noncompliant individuals were responsible for $63.5 billion of the gross tax gap. They may be sidewalk vendors, moonlighting craftsmen or mechanics, unlicensed providers of child or elderly care services, store proprietors who make money ``off the books,'' and so on. Corporations account for virtually all of the remaining $21.4 billion. In that year, 83.5 percent of individuals and 82.5 percent of corporations voluntarily complied with the tax laws, according to rough estimates of the IRS.
That means around 16.5 or 17.5 percent of such taxpayers are cheating on their taxes, perhaps not all consciously. Probably the bulk of honest taxpayers would not mind seeing the IRS given a few thousand more agents to make the dishonest pay up.