Idea of the Day: Enhance Enforcement of the Tax Code

May 5, 2008

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The tax code is full of holes that allow individuals and corporations to avoid paying taxes, which undermines the fairness of the system and places undue burdens on those that pay their full obligation. In 2006, there were a total of $911 billion in tax expenditures included in the tax code. While some of these provisions contain valuable incentives to businesses and individuals, there are also many provisions that are simply used to reduce tax obligations.

In addition to this legal avoidance, billions of dollars are owed to the federal government, but are never collected. Under-reporting—and non-reporting—of income and other forms of illegal evasion amount to uncollected revenue, creating the so called “tax gap,” which was estimated by the Internal Revenue Service to be approximately $345 billion in 2001.13 While the IRS expects to recover a portion of this—around $55 billion—it is still estimated that nearly $290 billion will go uncollected. The non-collection of this amount of revenue essentially means that the tax rate necessary to fund the government is higher than it need be.

Closing the entire gap would be difficult, but there are some simple steps that could be taken to collect more of the revenue, such as requiring the reporting of stock purchase prices to be used in the calculation of capital gains revenue. While financial firms are already required to report stock sales, dividends, and interest payments, they are not currently required to report the purchase price, which is essential to calculate capital gains tax liability. The tax gap for capital gains under-reporting is at least $11 billion. Further, it is estimated that individual taxpayers use offshore tax schemes to evade between $40 and $70 billion in taxes every year.

For purposes of the national economic strategy, we assume that Congress and the president can work together to improve enforcement and to close loopholes amounting to $50 billion annually. This is just one-sixth of the net uncollected tax gap (from 2001), and just one-twentieth of the total annual tax expenditures. This should be an obtainable goal.

For more on the Center's policies on tax reform, please see:

• Responsible Investment: A Budget and Fiscal Policy Plan for Progressive Growth by David Madland and John Irons