The fight over how to close the “tax gap”


Republicans and Democrats had very different views on taxes. Not that long ago, Republicans tended to want lower and lower taxes, while Democrats tended to want more taxes, or at least higher taxes in some circumstances.

Democrats haven’t really changed their minds on taxes, but with the rise of the anti-Big Tech right, some GOP members have. “Key Republicans,” reported Axes this summer, “are warming to an idea that was once anathema to the party: leveling taxes on big American corporations to pay for Internet subsidy programs.” Republicans at the state level have gone even faster.

One tax issue that Democrats and Republicans have never agreed on is the so-called “tax gap,” the difference between the taxes actually paid and what the IRS believes it should collect. The tax gap represents approximately the amount of non-compliance with our tax laws. Every year it is in the hundreds of billions of dollars, money that should be added to federal tax revenues, but does not.

The tax gap exists because taxes in the United States are “voluntary,” in the sense that those who file taxes tell the IRS how much they earned and how they did it, rather than having a system where the government does your taxes for you. Even when your employer withholds taxes from your paycheck to send to the IRS, it is still self-reported; the government doesn’t really know much that you’ve earned until you file your taxes. It’s a complicated system, with a myriad of special provisions subject to, shall we say, interpretation-but overall the system works pretty well.

But it’s not perfect, as the example of former President Donald “I paid $ 750 in taxes” Trump taught us.

Can the tax gap be reduced? Yes. Can it ever be fully firm? No, for a mixture of reasons.

For starters, if you confiscated all the wealth of American billionaires, you couldn’t pay much. Yes, almost $ 5,000 billion is a lot of money, but last year the US federal government spent almost $ 7 trillion. After this one-time confiscation, we would be out of billionaires – and while, yes, some of them are obnoxious or judgmental, most billionaires create jobs for a lot of people.

What about the point, generally raised by the Conservatives, that the rich pay the majority of federal income taxes? There is some truth. The richest 1% of Americans paid about 40% of all personal income taxes in 2017, according to the Tax Foundation, more than the amount paid by the poorest 90%, but that figure excludes others taxes, like FICA (which funds Medicare and Social Security) and sales taxes.

When I was working as a member of the Senate staff, I remember writing a letter from my boss, then a member of the finance committee, to a voter enraged that General Electric “paid nothing in taxes” to the government. during a certain fiscal year. I assured the voter that was not true. GE obviously pays FICA taxes on the employer side for tens of thousands of its employees.

The reason GE was in the sights of progressive activists at the time was that its investment arm was losing a ton of money, but what is known as a net operating loss carryforward allowed it to business to apply losses to future tax. This provision of the tax code is not limited to large companies, it also applies to individuals. This is why Donald Trump’s taxes were such a fool for the Liberals. It is indeed infuriating that a guy (who definitely inflates his wealth, and probably some of the values ​​of things he sees as losses) can “cheat the system” in this way.

Could Congress remove provisions in the tax code that allow businesses to deduct losses from future earnings? Of course, in theory. But let’s be honest with ourselves: it just won’t happen. If Democrats don’t have the votes to reverse the GOP’s long-contested and hard-won inheritance tax gains, they won’t embrace a radical change in the nature of corporate tax accounting.


Ait’s the the Wall Street newspaper reported, one idea the White House and Congressional Democrats have come up with to close the tax gap is to give the IRS the ability to get more data on bank accounts worth more than $ 600, especially to see the amounts of money going in and out.

The way the Conservatives reacted to this rushed idea, you’d think Janet Yellen ran over their dog with a car. Republican Missouri Rep. Ann Wagner, opposing the idea, said this to a voter in a standard letter:

As you may know, as part of President Biden’s plan to increase spending and taxes, Congressional Democrats have proposed including requirements for financial institutions to report inflows and outflows of accounts. over $ 600 to the IRS each year.

This proposal raises major privacy concerns that could deter individuals from opening bank accounts and further exacerbate the gap between those who have and do not have access to financial services. Privacy is one of the main reasons people choose not to open a bank account, and with multiple data breaches involving the IRS occurring each year, a proposal to dramatically increase the amount of sensitive data held by the IRS would further discourage hesitant Americans from opening accounts.

You might be interested to know that financial institutions are already reporting a huge amount of data to the IRS, and there is no evidence to show that increasing disclosure requirements would reduce the tax gap. Instead, this proposal would force financial institutions as well as the IRS to spend significantly more money to collect, store, and secure the personal financial information of millions of Americans. [Emphasis added.]

Note the bs argument that I’ve italicized: Wagner suggests that allowing the IRS this information will discourage people who don’t have bank accounts – about 6% of U.S. households – from opening bank accounts. accounts. There are many reasons people don’t have a bank account. Some people just don’t trust banks and prefer to keep their money under their mattresses. Some people think they don’t have enough money to deserve having a bank account. Some people are simply not educated in banking. And some people don’t have the proper identification and papers to open a bank account. But the claim that the prospect of IRS spying could prevent people from opening a bank account is by no means convincing.

What Democrats want to do is give the IRS more knowledge about where and how money is flowing. As the IRS commissioner wrote last month, more and better data “will provide the IRS with a focus on otherwise opaque revenue sources with historically lower levels of reporting accuracy.” By opposing the move, Republicans say they are standing up for privacy and people who don’t yet have a bank account but could hypothetically do so someday, but they are really covering up for tax fraud.

Bottom line: Will giving the IRS the ability to catch tax evasion with accounts with balances over $ 600 breach the tax gap? Yes. Will it encroach on our “freedom”? Not significantly, no.

There are better options for closing the tax gap, including giving more money to the IRS audit division to do its job. But they will also need more and better data to know who to audit. Without it, what is it for?


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