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The Tax Gap

A Big Part of Deficit Reduction Is Making Sure People and Corporations Pay the Taxes They Owe

This is the latest in a weekly series of talking points from CAP’s Doing What Works team showing how we can make smart budget cuts and targeted investments that boost government efficiency—not gut essential services.

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The United States loses some $100 billion<i> </i>in tax revenues annually because of offshore tax abuses by wealthy individuals and corporations in the Caribbean and elsewhere. (AP/Alexandre Meneghini)
The United States loses some $100 billion in tax revenues annually because of offshore tax abuses by wealthy individuals and corporations in the Caribbean and elsewhere. (AP/Alexandre Meneghini)

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As much as half a trillion in unpaid taxes every year makes our budget deficit far worse

  • An estimated $400 billion to 500 billion in taxes go uncollected every year in the United States because of tax evasion and noncompliance. [1]
  • The United States loses some $100 billion more in tax revenues annually because of offshore tax abuses by wealthy individuals and corporations.
  • This yawning “tax gap” increases the deficit and undermines the faith of honest taxpayers who don’t cut corners.

Every additional $1 invested in tax enforcement and compliance can shrink the deficit by at least $3

  • President Barack Obama’s proposal to invest an additional $13 billion in IRS enforcement and compliance activities over the next decade will generate more than three times that amount in additional revenues—$42 billion, according to official estimates.
  • The funding will allow the IRS to contact potentially noncompliant taxpayers that “it currently identifies but cannot contact given resource constraints” and strengthen pre-refund compliance checks, according to the Government Accountability Office.
  • Better enforcement leads to greater compliance: After the IRS in recent years began targeting people using offshore bank accounts to evade taxes, about 19,000 taxpayers entered a voluntary compliance program and paid billions in back taxes and penalties.

Efforts to cut the IRS will only make the budget deficit worse

  • “Cuts of this magnitude would be substantial and affect all of IRS operations,” from answering taxpayers’ questions on the phone to conducting audits, according to IRS Commissioner Douglas Shulman.
  • Not only would cutting the IRS benefit tax cheats, it would make it harder for honest taxpayers “to understand and comply with changes in the tax law . . . as well as to successfully resolve pre-filing, filing and post-filing tax matters,” according to a recent report by law firm K&L Gates.

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Seth Hanlon is Director of Fiscal Reform at the Center for American Progress. Julia Kantor, an intern at CAP, provided research assistance.

Endnotes

[1]. The IRS estimated that in 2001, the “net tax gap"—the difference between what is owed in taxes and what is actually paid (including after IRS enforcement actions)—was nearly $300 billion. Assuming that the tax gap has expanded at the same rate as the overall economy over the last decade, it would stand at between $400 billion to 500 billion today.

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Authors

Seth Hanlon

Senior Fellow

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