A couple of weeks ago, I hosted an informal roundtable discussion on Capitol Hill titled “Making Headway on Closing the Tax Gap.” I wanted to bring some very bright people together to share ideas and consider each other’s viewpoints on an extremely important topic commonly referred to in DC as the “federal tax gap.” I sometimes prefer to hold roundtables instead of more formal hearings because roundtables provide a forum for a freer exchange of ideas than most usual Senate hearings and can be helpful in developing consensus on some of the issues and challenges that we face as a nation.

My hope is that, as a result of this roundtable and other similar discussions, the Congress and the next President will be able to get something done in the near term and begin making real headway toward closing the tax gap next year.

Some of you might be asking, “Well, just what is this tax gap anyway?” Simply put, the tax gap results from the federal government not collecting revenue it is legally owed. In 2001, this gap was estimated by the Internal Revenue Service to be $290 billion per year. Participants in our recent roundtable suggested that the gap today may have grown to over $400 billion per year. That’s roughly what our federal deficit ended up reaching in the fiscal year that ended on September 30, 2008. By the way, that deficit was the largest in the history of our country.

The tax gap grows out of a combination of three taxpayers’ actions: 1) not filing; 2) underpaying; and 3) under reporting income.

Nonfiling occurs when taxpayers who are required to file a federal tax return do not. Underpayment occurs when taxpayers file a tax return, but pay less than they owe to government. Making up 80 percent of the tax gap is underreporting, which occurs when taxpayers understate their income or overstate their deductions, exemptions and credits.

During the first presidential debate, each candidate was asked – three times actually – which of their initiatives they would jettison because of the $700 billion price tag created by the banking rescue package. It’s not surprising that neither candidate directly answered the question. With the stakes so high, neither wants to admit what programs would take a back seat.

My own answer to that question begins with this observation: If we’re smart about it, and if the recently-enacted financial rescue plan is well-executed, there’s a good chance that this rescue effort won’t cost taxpayers anywhere close to $700 billion. 

It should be a principle goal of the next administration to ensure that the effort turns out – at worst – a breakeven proposition for taxpayers. In fact, hopefully, we’ll end up recouping these costs, or perhaps we might even make money for the U.S. Treasury, much like we did after the Chrysler bailout in the 1980s.

However, even if the Treasury ultimately recovers the monies invested in the rescue plan, the federal government still faces large budget deficits in the short-term. We also face serious long-term budget challenges resulting in part from escalating health care costs and the strains on our entitlement programs with the retirement of 55 million “baby boomers.”

Fortunately, there is some “low-hanging fruit” available to the next president and Congress to begin ratcheting down future budget deficits below the record-setting shortfall for the fiscal year that we’ve just concluded.

One of these opportunities flows from getting serious about closing the federal tax gap. 

Essentially, some taxpayers shortchanged the American people by nearly $300 billion in 2001, amounting to roughly $950 for every man, woman and child in America. And, as I noted above, it’s a safe bet that this figure is even higher today.

This is real money we’re talking about, folks. One way to make this figure more tangible is to take a look at what we could do with this much money, if we were actually collecting taxes from everyone who owed them. Besides cutting the deficit by more than half, we could also invest in some of the things that our country needs such as improved transportation systems, renewable sources of energy, early childhood education and curing diseases like Alzheimer’s, and we could make those investments without raising anyone’s taxes.

Having said that, though, we’re going to have to be smart in weighing the many different ways available to us to begin closing this gap.  No single approach alone will work, but let me lay out a couple of proposed lines of attack.

First, we should expand withholding where feasible. Empirical studies have found that when a portion of their incomes are withheld, taxpayers generally follow the law upwards of 99 percent of the time. Second, we should require more third-party reporting, which pushes compliance rates to about 90 percent. Think of those 1099 forms that many of us get in the mail in January to assist us in accurately preparing our tax forms.  And third, we must encourage more voluntary tax payments, an approach which has the virtue of being less intrusive and more convenient for taxpayers.

I realize the importance of collecting this unpaid revenue. In a number of areas during my tenure in the Senate, we have focused on a specific aspect of an issue and just hammered away at it until we could make it happen. For example, we spent some time looking hard at one specific portion of defense spending.

We investigated whether we were achieving strategic airlift — our ability to move troops and cargo over long distances by air — in a cost-effective way.  Through our efforts, we concluded that we could save federal taxpayers several billion dollars by modernizing much of our C-5 aircraft fleet, rather than continuing to by more expensive C-17 aircraft that carry roughly half as much and can’t travel as far as a fully-loaded C-5.

In addition, in my role as chairman of the Homeland Security Federal Financial Management Subcommittee, I have worked to reduce the amount of money wasted each year on improper payments to federal contractors, such as overpayments, duplicate payments, or fraudulent payments.  In the aggregate, those improper payments are believed to exceed $50 billion per year.  That’s “billion” with a “b.”

If the next Congress and the next President want to get serious about reducing our federal deficit and paying for new spending – and God knows we need to – then we’ve got to do a better job of thinking outside the box and finding ways not only to reduce wasteful spending, but to dramatically improve revenue collection, as well.

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